How to tell if a company is making money

Where to find a listed company's results and the few numbers that show whether it is growing, profitable and paying dividends.

Read at your own pace. A video for this lesson is on the way.

Before we begin

Quick answer: sales alone do not tell you whether a company is profitable, and profit alone does not show its cash position. By the end, you should be able to:

• Compare revenue and profit over matching periods.
• Calculate profit margin and a simplified earnings-per-share figure.
• Identify questions to investigate before judging a company. We continue with Adinkra Foods, a fictional processor in Kumasi selling packaged food to shops across Ghana. No figures below describe a real business.

Step 1: find the report and check the labels

For a real company, start with its published annual report and investor-relations announcements. Use original documents rather than a cropped social-media screenshot. Before calculating, check:

1. Period: are both columns full years, rather than one year and one quarter?
2. Units: does "69" mean GHS 69, GHS 69,000 or GHS 69 million?
3. Scope: are you comparing the whole group with the whole group, rather than the group with just its parent company?
4. Status: is it audited annual information or interim information? Read the notes and auditor's report where available. Download the source so you can return to the exact table.

Step 2: separate sales from profit

Revenue is income earned from selling goods or services. Profit after tax is what remains after the recognised costs and tax for the period. It is not necessarily cash available to withdraw. Our simplified report shows:

Worked example: sales rise while profit falls

1. Revenue increase: 920 - 800 = GHS 120 million.
2. Revenue growth: 120 / 800 x 100 = 15%.
3. Profit change: 69 - 80 = -GHS 11 million.
4. Profit change percentage: -11 / 80 x 100 = -13.75%. The company sold more in cedi terms but reported less profit. These totals alone do not prove the cause. Investigate ingredients, power, transport, finance costs, tax and one-off items in the notes. Higher prices can also increase revenue without an increase in the number of products sold.

Step 3: ask how much profit remains from sales

Profit margin = profit after tax / revenue x 100.

• Last year: 80 / 800 x 100 = 10%.
• This year: 69 / 920 x 100 = 7.5%. For every GHS 100 of revenue, profit fell from GHS 10 to GHS 7.50. Margin fell 2.5 percentage points. That is different from saying it fell 2.5%. Compare businesses with similar activities; a supermarket and a bank do not have identical operating models.

Step 4: look at profit per share

In this simplified example, assume all profit belongs to ordinary shareholders, there are no preference dividends, and the share count stayed at 400 million throughout the year. Earnings per share (EPS) = 69 million / 400 million = GHS 0.1725. Last year's EPS was 80 / 400 = GHS 0.20. Real reports use the relevant profit attributable to ordinary shareholders and a weighted-average share count; they may also report diluted EPS. Read the published EPS note rather than blindly dividing headline profit by the final share count. EPS is an accounting measure. It is not the cash dividend each share must receive.

Your turn: calculate before rounding

Suppose a share costs GHS 3.45 and EPS is GHS 0.1725. What is its price-to-earnings ratio (P/E)?

A low P/E can reflect low expectations or a problem. A high P/E can reflect expectations that do not come true. With zero or negative EPS, ordinary P/E comparisons become unhelpful.

Step 5: check cash and obligations

Imagine Adinkra Foods makes a GHS 10,000 credit sale to a shop, due next month. Under the example's accounting assumptions the sale is recognised now, but the customer has not yet paid. Profit and cash can therefore move differently. Check operating cash flow, unpaid customer balances, inventory, borrowings and when debts fall due. One weak cash-flow period calls for investigation, not an automatic verdict. Read management's explanation alongside the numbers. An audit provides assurance about the statements under its scope; it is not a guarantee of investment success.

Common mistakes to avoid

• Comparing a quarter's profit with a full year's profit.
• Mixing figures shown in thousands with figures shown in millions.
• Treating EPS as a promised dividend.
• Explaining lower profit with a cause you have not checked.
• Buying because a single ratio looks low.

Put it into practice

Create a three-year table for one company's revenue, profit, published EPS and operating cash flow. Record the report dates and units. Write two observations and two unanswered questions. For example: "Revenue grew, but margin fell. What changed in costs?" A good first analysis can end with questions rather than a buy-or-sell decision. Use the business profit calculator to practise how costs affect a simple business, while remembering that a listed group's accounts are more complex.

This is general financial education, not financial advice. Figures are illustrative. Speak to a licensed professional before making investment decisions.

Sources: US SEC, financial statements (general accounting concepts), Ghana Stock Exchange, Ghana Stock Exchange, FAQs

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