With the economic uncertainty caused by the pandemic, many companies are facing tough challenges and their earnings are feeling the pressure. While every industry has its own unique set of issues, there are three main indicators that investors should be looking out for when considering the financial health of a company. The top three indicators that can potentially influence a company’s earnings and market valuation include fixed costs, customer demand, and debt.
Fixed Costs are those expenses that do not change regardless of the amount of production or services that a company generates, such as rent, insurance, and utilities. When business slows down, the revenues generated by a company will naturally decline, but fixed costs remain constant. This can lead to a decreased profit margin, putting downward pressure on a company’s earning and valuation.
The next indicator to watch out for is customer demand. A healthy economy and robust consumer demand lead to increased sales and subsequently, greater earnings. On the flip side, when consumer demand is low due to economic uncertainty and a weak job market, sales and earnings will equally be reduced. The resulting decrease in earnings puts pressure on a company’s valuation.
The last indicator to be aware of is debt. Companies with high levels of debt can experience a decrease in earnings due to the interest payments associated with the debt. As earnings decline, the equity and share price of the company can be reduced.
All three indicators – fixed costs, customer demand, and debt – are very important to consider when evaluating a company’s current and future earnings and valuation. Investors should therefore keep a watchful eye on these indicators to get an understanding of a company’s existing financial situation as well as its potential earnings.