How to Read a Company by the Numbers: Where Do You Start?

When analyzing a company, understanding “what the business does” matters just as much as “how well it earns and keeps profits.” This post pulls together the core metrics most used in company analysis—kept simple enough for middle schoolers—covering quick definitions, how to interpret them, and key watch-outs. We’ll start with the fundamentals of the income statement—revenue, operating profit, and net income—then move on to valuation, profitability, growth, stability, efficiency, and dividend metrics.

The Core Scorecard: Revenue, Operating Profit, Net Income

Revenue
  • Meaning: The total amount from selling goods or services. It shows “how much you sold.”
  • Watch-outs: Revenue is recorded on an accrual basis, so sales may be recognized before cash is collected. Always check the cash flow statement alongside it.
Operating Profit
  • Meaning: Profit from the core business after deducting cost of goods sold (COGS) and SG&A (salaries, advertising, rent, etc.) from revenue.
  • Interpretation: A barometer of core earnings power. It’s less affected by one-offs or financial income.
Net Income
  • Meaning: The bottom line after reflecting interest income/expense, other gains/losses, and corporate taxes on top of operating profit.
  • Watch-outs: Can be volatile due to FX, mark-to-market effects, and non-recurring items. Often viewed on a per-share basis (EPS = Net income / Shares outstanding).

Example) If revenue is 100, operating profit 15, and net income 10

  • Operating margin = 15% (profitability of the core business)
  • Net margin = 10% (what ultimately remains)

Valuation: Is the Stock Expensive or Cheap?

P/E (Price-to-Earnings Ratio)
  • Formula: Share price / Earnings per share (EPS)
  • Meaning: “How many times earnings is the stock price?” Lower is often seen as cheaper, but reasonable P/E varies by growth profile and industry.
  • Tip: Distinguish Trailing (last 12 months) from Forward (next 12 months). Cyclicals (e.g., semiconductors, shipbuilding) can screen expensive at the trough because earnings are temporarily depressed.
P/B (Price-to-Book Ratio)
  • Formula: Share price / Book value per share (BPS)
  • Meaning: How much the market pays per dollar of book value.
  • Interpretation: Companies with high and stable ROE often trade above 1x P/B. Asset-heavy sectors (real estate, plant) and intangible-heavy sectors (brand, software) warrant different lenses.
P/S (Price-to-Sales Ratio)
  • Formula: Market capitalization / Revenue
  • Meaning: Useful for valuing loss-making or early growth companies. It ignores margin differences, so pair it with operating margin.
P/CF (Price-to-Cash Flow Ratio)
  • Formula: Market capitalization / Operating cash flow (CFO)
  • Meaning: A valuation anchored on “the cash the company actually generates.”
  • Tip: In capex-heavy sectors, also look at P/FCF (based on free cash flow).

Profitability: How Much Does the Business Keep?

ROE (Return on Equity)
  • Formula: Net income / Shareholders’ equity
  • Meaning: Earnings generated relative to equity capital. High and consistent ROE often signals quality.
  • One step further: ROE = Net margin × Asset turnover × Financial leverage (DuPont analysis). If ROE is boosted mainly by excessive leverage, risk rises.
ROA (Return on Assets)
  • Formula: Net income / Total assets
  • Meaning: How efficiently assets are used. ROA can look low in asset-heavy sectors like financials and manufacturing—compare within the industry.
Operating Margin
  • Formula: Operating profit / Revenue
  • Meaning: Shows core competitiveness and pricing power (ability to pass costs through to price).
Net Margin
  • Formula: Net income / Revenue
  • Meaning: Final profitability after interest, taxes, and other items. The more stable, the better.

Growth: How Fast Is It Scaling?

Revenue Growth Rate
  • Meaning: Year-over-year revenue growth. Reflects market share gains, new product success, etc.
  • Tip: High growth paired with widening losses can be risky. Check the balance between growth and profitability.
Operating Profit Growth Rate
  • Meaning: Growth in profit from core operations. Captures cost efficiencies and scale effects.
EPS Growth Rate
  • Meaning: Growth in earnings per share. Influenced by earnings growth and share count changes from buybacks. Distinguish true underlying growth from accounting or capital actions.

Stability: Can It Withstand Shocks?

Debt-to-Equity Ratio
  • Formula: Total liabilities / Shareholders’ equity
  • Meaning: Balance sheet strength. Excessive leverage raises risk when rates rise or the economy slows.
  • Watch-outs: Lease liabilities under IFRS 16 can make leverage look higher versus the past. Compare to industry averages.
Current Ratio
  • Formula: Current assets / Current liabilities
  • Meaning: Ability to cover obligations due within a year using short-term assets. 100%+ is generally safer.
  • Tip: For inventory-heavy businesses, use the Quick Ratio (acid-test) for a more conservative check.

Efficiency/Activity: How Fast Do Assets Turn?

Asset Turnover
  • Formula: Revenue / Total assets
  • Meaning: How much revenue is generated per dollar of assets. Even with thin margins, high turns can make for a great business (e.g., big-box retail).
Inventory Turnover
  • Formula: COGS / Inventory
  • Meaning: How quickly inventory sells. A decline can signal inventory build and potential markdown risk.
Receivables Turnover
  • Formula: Revenue / Accounts receivable
  • Meaning: How quickly credit sales are collected. Slower turns can hurt cash flow.
  • Tip: Expressed in days it’s more intuitive. DSO (Days Sales Outstanding) = 365 / turnover.

Dividends: What About Cash Returns?

Dividend Yield
  • Formula: Dividend per share / Share price
  • Meaning: Annual cash dividends as a percentage of the current share price. High yields can be appealing but may be “yield traps” if the stock has fallen on deteriorating fundamentals.
Payout Ratio
  • Formula: Total dividends / Net income
  • Meaning: How much of earnings are paid out as dividends. Too high can constrain reinvestment; too low can signal weak shareholder return policies.
  • Tip: Payout versus free cash flow (FCF) can better indicate sustainability than earnings-based payout.

How to Read Metrics Together: Combinations and Context

  • Low P/E and high ROE? Could be a “value” candidate with strong profitability.
  • High P/B can be justified if ROE is very high and growth is robust (brand- or platform-driven businesses).
  • High P/S with no margin improvement plan may indicate overvaluation.
  • Strong growth alongside surging leverage and worsening liquidity suggests the need to slow down.
  • Deteriorating turnover (lower activity ratios) paired with rising inventories can signal weakening demand.

Pitfalls in Reading the Numbers: Must-Remember Watch-outs

  • Strip out one-offs: Gains on asset sales, FX swings, government subsidies may not be repeatable.
  • Accounting vs. cash: If revenue rises but operating cash flow falls, collections may be slowing or inventories building.
  • Industry specifics: Banks/insurers, platforms, semiconductors all require different yardsticks and interpretation. Always compare within the peer group.
  • Consistent time frames: Mixing TTM (trailing 12 months), annual, and quarterly figures leads to errors. Align periods before comparing.
  • Rates and FX backdrop: Directly affect interest expense, import costs, and export pricing.

A Ready-to-Use Checklist

  1. How does the company make money? Summarize the core business in one line.
  2. Are revenue, operating profit, and net income steady for 3+ years? If not, why the volatility?
  3. Is the gap between operating and net margins wide? Check the impact of interest, taxes, and one-offs.
  4. Are ROE and ROA above industry averages? Is ROE driven by leverage?
  5. Are revenue/earnings/EPS growth all improving together? Check share count changes (buybacks/issuance).
  6. Compare P/E, P/B, P/S, and P/CF to sector averages to gauge under/overvaluation.
  7. Are leverage and liquidity (D/E, current ratio) safe? Stress test for rising rates.
  8. Are asset, inventory, and receivables turnover improving? Track DSO, DIO, DPO trends.
  9. Do dividend yield and payout ratio fit the business stage? Recheck sustainability with FCF.
  10. Are the changes “one-off” or “structural”? Cross-check management commentary and industry data.

Key Takeaways and Conclusion

  • Start by understanding the flow from revenue → operating profit → net income.
  • Valuation metrics (P/E, P/B, P/S, P/CF) show “expensive vs. cheap,” while profitability (ROE, ROA, margins) shows “how well the business earns and keeps profits.”
  • Growth metrics show the speed, stability metrics the resilience, efficiency metrics the asset utilization, and dividend metrics the cash returned.
  • No single metric is sufficient. Always add industry context, cash flow, and one-off adjustments to cross-check.

  • In the end, good companies combine consistent profitability + a healthy balance sheet + sustainable growth + reasonable valuation. Run through the checklist to double-check.