What Is Financial Performance? (2024)

What Is Financial Performance? (1)

Key Takeaways

  • Financial performance refers to a company’s overall fiscal health, but there’s no single metric that measures it.
  • Publicly traded companies are required to provide detailed financial information by filing Form 10-K annually with the SEC.
  • Financial performance analysis is most effective when investors compare companies in similar industries.

Definition and Examples of Financial Performance

Financial performance is a general term that describes the overall financial health of an organization.

Financial performance metrics are quantifiable, meaning you can measure. But just as your doctor can’t tell you how healthy you are just by taking your temperature or blood pressure, there’s no single way you can measure financial performance.


Any financial performance metric should be considered in a broader context, such as the company’s business model or even the industry it operates in.

For example, a firm may be rapidly increasing its revenues, but that doesn’t mean its financial performance is strong. To assess its financial performance, you’d also need to look at its expenses, its liabilities, and how much free cash it has available.

How Does Financial Performance Work?

Financial performance matters to investors, who make decisions about whether to buy or sell a company’s stocks and bonds based on this information. But investors aren’t the only ones who care about financial performance. Managers use this information to determine how to allocate company resources. Analysts use financial performance data to make forecasts about future earnings and growth. Lenders use this information to assess whether a company is creditworthy.


A company’s financial performance doesn’t always align with whether its shares gain or lose value. Sometimes, a company’s share prices will tank even after a strong earnings report. Or a company’s share prices will soar, even though it has yet to actually earn profits.

For example, Tesla went public with an IPO in 2010, but it only achieved a full year of profitability in 2020. However, its shares rose from $4.7 at the end of June 2010 to a high of $87 in December 2019, despite Tesla reporting an annual loss of $862 million in 2019.

The U.S. Securities and Exchange Commission (SEC) requires publicly traded companies to provide detailed financial information by filing Form 10-K annually. Companies are also required to provide an annual report to shareholders when they hold annual meetings to elect their boards of directors. You can access a company’s 10-K statement using the SEC’s EDGAR database.

You can find the information you need to assess a company’s financial performance by examining its financial statements. The three most common types of financial statements are the balance sheet, income statement, and cash flow statement, which are explained in greater detail below.


Investors can find important context for analyzing financial performance in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, which accompanies annual and quarterly reports. The MD&A includes insight from management about the financial statements, as well as trends and risks.

Balance Sheet

The balance sheet provides an overview of a company’s assets, liabilities, and shareholder equity for a reporting period. It doesn’t show cash inflows and outflows.

  • Assets: This is property the company owns. This includes cash; physical property such as real estate, buildings, and equipment; and intangible assets, i.e., assets that can’t be touched, like patents or trademarks.
  • Liabilities: This is money the company owes. Examples include a mortgage or rent, bank loans, money owed to suppliers, taxes due to the government, and employee payroll obligations. Current liabilities are obligations due within a year, while long-term liabilities are due more than one year out.
  • Shareholder equity: This is how much shareholders have invested. If a company sold all assets and paid off all liabilities, only shareholder equity would remain.

Income Statements

Also known as a profit and loss (P&L) statement, an income statement shows you a company’s revenue for the reporting period, along with its costs and expenses for the same period. The bottom line typically shows you the company’s net profit or loss. The statement also usually includes the company’s earnings per share.

Cash Flow Statement

A cash flow statement includes information from both the balance sheet and income statement. It shows cash inflows and outflows from operations, investment activity, and financing. The bottom line of the statement shows you the net increase or decrease in cash for the reporting period.

Types of Financial Performance Metrics

Financial performance metrics or key performance indicators (KPI) will vary by industry, but here are some important metrics both investors and managers often consider.

Net Profit Margin

This type of profit margin shows the percentage of revenue that’s left after accounting for all costs, including operating costs, taxes, amortization, and depreciation.


Net-profit margins vary widely by industry, but a company with higher net margins compared to its peers is usually more competitive.

Net profit margin = Net profit / revenue x 100

Liquidity Ratios

Liquidity ratios measure a company’s level of cash and assets that can easily be converted to cash that a company has on hand to meet its obligations.

  • Current ratio: Measures a company’s ability to pay its current debt (i.e., obligations due within a year) with current assets (i.e., cash and assets that will be converted to cash within a year).

Current ratio = Current assets / Current liabilities

  • Quick ratio: Also known as the acid test, the quick ratio excludes inventory from current assets and the current portion of long-term debts to show a company’s ability to meet its short-term obligations.

Quick ratio = [Current assets - inventory] / [Current debt - current long-term debt]

Financial Leverage

A company’s financial leverage ratio, or equity multiplier, shows how much of its assets are financed by shareholder equity versus debt. A company with a higher equity multiplier is more reliant on debt—therefore, it’s typically seen as a greater risk.

Leverage = Total assets / Total equity

Earnings Per Share

Earnings per share, or EPS, tells you how much profit a company is earning per share of outstanding stock. Examining a company’s earnings per share over time can show investors how its profits are trending, providing that a company isn’t issuing new shares or repurchasing large numbers of existing shares.

Earnings per share = Net earnings / Outstanding shares

Price-to-Earnings Ratio

The price-to-earnings ratio, or P/E ratio, divides the current share price by earnings to share. Value investors often look for companies with a low P/E ratio compared to their peers. However, growth investors are often less concerned with P/E ratios because they believe the rapid growth potential justifies a higher price.

P/E ratio = Market price / Earnings per share

Operating Cash Flow

Operating cash flow refers to the amount of cash a company has from its operations. If the number is positive, it can maintain and expand operations. If it’s negative, additional financing is needed to continue operating at current levels.

Example of Financial Performance: Home Depot vs. Lowe’s

To understand how financial performance works, let’s compare the financial performance for home improvement rivals Home Depot and Lowe’s. This comparison is based on quarterly financial statements for the fiscal quarter that ended April 30, 2021, for Lowe’s and May 2, 2021, for Home Depot, and historic stock prices.

Home DepotLowe’s
Net margin (TTM, or trailing 12 months)10.45%7.23%
Current ratio1.111.17
Quick ratio0.370.29
Earnings per share (diluted)3.863.21
Trailing P/E ratio (based on the past year’s earnings) as of April 3027.1125.32
Operating cash flow (TTM)$19.41 billion$11.09 billion

Based on Home Depot’s and Lowe’s recent financial performances, Home Depot has a higher profit margin and superior earnings per share. However, Lowe’s has a slightly lower P/E ratio, indicating it could be a better value. The companies are fairly similar in terms of liquidity, but Lowe’s is more leveraged, suggesting that it’s relying more on debt for financing compared to Home Depot.

What It Means for Individual Investors

Individual investors should be careful not to rely on any single metric in evaluating financial performance.


Financial performance analysis is most effective when it’s used to compare companies in similar industries. Otherwise, you risk apples-to-oranges comparisons.

Using a company’s recent financial performance and comparing it against past performance can help you spot important trends. But it’s also important to remember that past performance doesn’t indicate future results. Even if a company has a record of good financial performance, that’s no guarantee it will perform well moving forward.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

  1. Harvard Business School Online. "How & Why Managers Use Financial Statements." Accessed July 20, 2021.

  2. Tesla Investor Relations. "Press Releases-Tesla Announces Pricing of Initial Public Offering." Accessed July 20, 2021.

  3. U.S. Securities and Exchange Commission. "Form 10-K Tesla Inc." Accessed July 20, 2021.

  4. U.S. Securities and Exchange Commission. "Beginners' Guide to Financial Statements." Accessed July 20, 2021.

  5. FINRA. "Six Financial Performance Metrics Every Investor Should Know." Accessed July 20, 2021.

  6. Morningstar. "The Home Depot." Accessed July 20, 2021.

  7. Morningstar. "Lowe's Companies Inc." Accessed July 20, 2021.

  8. The Home Depot. "The Home Depot Announces First Quarter Results." Accessed July 20, 2021.

  9. Lowe's. "Lowe's Reports First Quarter 2021 Sales and Earnings Results." Accessed July 20, 2021.

What Is Financial Performance? (2024)


What is the meaning of financial performance? ›

What Is Financial Performance? Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. The term is also used as a general measure of a firm's overall financial health over a given period.

What is a good financial performance? ›

A company in good financial health will pay its bills on time and maintain good business credit. Analysis of financial performance metrics can be used to identify internal investment opportunities, like automating repetitive processes to increase productivity, and can help maintain positive cash flow.

What are three financial performances? ›

The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.

What is the aim of financial performance? ›

Financial performance is an important metric to various stakeholders in the business. For investors and shareholders, it provides an indicator of how well the business will be able to generate a return on their investment. For lenders, it lets them know how well the business will be able to repay its loans.

What are the terms and definitions of financial performance? ›

Some of the most common include: Gross profit margin measures revenue minus COGS in proportion to total revenue. Net profit margin calculates revenue after subtracting all costs for the business, including COGS, plus operating expenses, interest, and taxes, in proportion to total revenue.

What is poor financial performance? ›

These are some warning signs that your business may be displaying poor financial performance: You're experiencing significant negative cash flow issues. Your business debt levels are increasing without an increase in equity. Your profit margins are falling. You've got high levels of unsold inventory.

What is good financial status? ›

The state and stability of an individual's personal finances and financial affairs are called their financial health. Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong returns on investments, and a cash balance that is growing.

How do you review financial performance? ›

You do this by reviewing your current (actual) financial statements, including the balance sheet, income statement, and cash flow statement—and comparing those with your budgets and forecasts.

What is the financial status of a person? ›

The term refers to an individual or group's overall financial condition or situation, including income, savings, debt, assets, and expenses.

What is not an element of financial performance? ›

Expert-Verified Answer. Answer: Financial performance typically involves several key elements, including revenue, expenses, profit, and cash flow. One element that is not usually considered a direct component of financial performance is customer satisfaction.

What are the two elements of financial performance? ›

Income and expenses, on the other hand, primarily interrelate within the Statement of Comprehensive Income. The relationship between these two elements is summed up in this fundamental profit equation: Profit = Income − Expenses Income indicates the total inflows or increases in asset values during a period.

What is in a statement of financial performance? ›

A balance sheet (also known as a statement of financial position) is a summary of all your business assets (what your business owns) and liabilities (what your business owes). At any point in time, it shows you how much money you would have left over if you sold all your assets and paid off all your debts.

What is financial performance or position? ›

- Financial performance demonstrates the efficiency of an entity when producing a profit (from operations) over a period, typically showing expenses and the amount gained from revenues over that set period. o This is conducted through an income statement - Financial position de picts the enterprise's financial ...

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