Why everyone should know KPIs
Every Investor has to know KPIs (Key Performance Indicators) to value Investments. But why did I write that everyone should know them in my title?
Knowing KPIs helps you even if you don’t invest any of your money. It helps you e.g. decide which job you should take or which customer you should prefer.
Deciding between Job Offers — an Example
Recently, I decided to start freelancing besides working on my own projects. I contacted some possible customers and some companies contacted me.
One Offer sounded interesting, but they seemed to be uncomfortable about the high of my payment.
So I looked the financials of the company up. They made losses in all years which they reported.
I also reminded myself that I gave a similar company a loan multiple years ago, and I still wait for the back payment.
After summarizing these facts in my mind, I declined the offer.
Why bad KPIs are bad for you
If I had taken the job, it could be that the company would lay me off in a few months or years because they don’t have the money to pay me.
Even if the financials had been stable enough to pay me, they would unlikely give me a raise because why should the CEO give the employees a raise if his own Investment loses money every year?
Not permanently employed freelancers most likely know customers which don’t pay. But this is an Issue which could be prevented if the Freelancers would know the current financial situation of their customers.
Bull-markets make us blind
In the last years, tech companies could make losses every year and still find investors, who gave them more money to burn.
This was partly because debts were cheap. At just 0.1 to 3% interest each year you can pile up debt without it hurting you.
The stock and housing markets went crazy because of this and many companies which made zero profit could continue to operate.
Times have changed
Currently, interest rates are rising, and debt repayments are getting more and more expensive. Companies have higher costs to refinance themselves.
Debts have to be paid and CEOs will fire people if they need to save money for repayments.
This is one of the reasons why Elon Musk is firing so many people at Twitter. Twitter loses money every year and it is harder to find Investors which love to see their money burning — so to be successful, Elon has to fire people.
What you can do
In some parts of the world, like Germany or the UK, you can look up the financials of incorporated companies. (See Bundesanzeiger in Germany and the Companies House in the UK)
In the US, you can at least look up the financials of public companies in the SEC EDGAR database.
You should always prefer a company which actually makes a profit and has a low debt ratio. (Which in turn means, it should have a high equity ratio)
A company without any profit shouldn’t be your employer or your customer because that kind of company could soon be bankrupt if it doesn’t find more Investors.