Determining a Company's Health

How much money do you make? Try asking any man and you will get all kinds of excuses. For some reason people don’t delight in talking about their salaries. But corporations do. Why? Because corporations are not people. Yes, corporations love to brag about their financial performance. Even the most private companies will jump to the opportunity of being mentioned in Forbes, Inc. 500, or anything that helps them to show-and-tell.

I do not blame those companies who enjoy being mentioned as “one of the fastest growing company” or “the most profitable company”, etc. The problem with such mentions is that they mostly consider a company’s financial performance without regard to other measures of performance. Just how are you supposed to judge a company’s health? The shortest cut is, of course, to look at its P&L. But if you buy a company based on the beauty of its P&L alone, you are in for some shocking experiences.

Though a company’s profit-and-loss statement tells a lot about its cash flow, it tells little about its overall health.

Just what should you look for in order to determine whether you should buy or invest in a particular company? Four things come to mind. Next time.