With innumerable companies declaring their quarterly results everyday, investors are left with little time to delve deeper into the reported numbers.

While the spotlight is usually on the revenue and net profit growth, here are five parameters that you must take note of when a company declares its results.

You may not own equity shares of these companies, but if you have invested in fixed income instruments such as FDs or NCDs, it is still important for you to keep a tab on the financial health of the companies you have lent to.

Operating profit and margin While most of us pay attention to the bottomline or the net profit reported by the company, it is very important to understand the company’s operating performance. Operating performance tells us how profitable the core business is.

Operating profit margin is arrived at by dividing the earnings before interest, depreciation and taxes by sales. Comparing operating profit margin for two periods will help us understand whether the company has made more money on the incremental revenue or not. Higher the operating margin, better the core business performance.

Interest cover ratio Debt to equity ratio measures the total long-term borrowings by the company as a proportion of the total share capital, and reserves and surplus.

But under normal circumstances, a company may not have to repay its entire borrowing in one shot.

However, in the interim period, it will have to pay the interest due on the total loan outstanding. This is why interest coverage ratio, which measures the operating profit by interest payable, is vital.

As an investor, why should you care about this?

For instance, if you have invested in a company’s FD and its interest cover is less than one, this implies that the company does not make enough profit to even pay the interest that is due on your FD.

Hence, chances that you may not receive the interest on your FD remain high. Worse, if the company’s financial position continues to be weak, your principal and interest may be at risk. So, companies with an average debt equity ratio of less than one and interest cover ratio of over four times may be preferred.

Working capital cycle In business, companies extend and get credit. Debtors represent the amount due to the business from its customers.

Creditors are the suppliers to whom the business owes money. The working capital cycle measures the total time it takes for one cycle, from production to realising cash.

The working capital cycle is the sum of inventory days and debtor days minus creditor days.

Inventory days are outstanding inventory divided by revenues, multiplied by the number of days in a year. Likewise, credit and debtor days measure the total creditors/debtors as a proportion of revenue, represented as days. Longer the cycle, the more will be the money needed to fund working capital.

Asset turnover ratio Expansion initiatives by companies are viewed positively by investors as they signal strong underlying demand for the company’s products or services.

However, the benefits from such investments need to flow to the company.

Asset turnover ratio is one way by which the pay-off from capital investments can be measured. The ratio measures the revenues that can be generated using the company’s fixed assets.

It is revenue as a proportion of the company’s total assets. Higher asset turnover ratio implies more efficient use of fixed assets.

Pledged shares Besides the financials, also keep a tab on pledged shares. Promoters usually pledge shares to meet either their own or the company’s short-term cash requirements.

So, a high proportion of pledged shares can be a sign of liquidity trouble. What’s more, in a falling market, pledged shares can hurt investors. A fall in the stock price, say, due to market weakness may trigger a margin call.

If the promoters fail to pledge more shares as margin or pay cash, it may trigger selling by the broker with whom the shares have been pledged.

This can result in a steep fall in the stock price. In the past, stocks have tumbled as much as 20-30 per cent in one session due to margin calls.

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