Studying a company’s financial strength is one of the most important skills in investing. It helps you avoid weak companies and focus on those that can survive downturns and grow steadily.
I’ll break this into two parts:
How to analyze financial strength
How to calculate Earnings Per Share (EPS)
1. How to Study a Company’s Financial Strength
You don’t rely on one metric—you combine several from the company’s financial statements (Income Statement, Balance Sheet, Cash Flow Statement).
A. Profitability (Is the company making real money?)
Key metrics:
Net Profit Margin
Return on Equity (ROE)
Operating Profit (EBIT)
What to look for:
Consistent profits (not one-off spikes)
Growing earnings over 3–5 years
Stable or improving margins
👉 Strong company = consistent profit growth, not erratic results
B. Liquidity (Can it pay short-term debts?)
Key ratios:
Current Ratio = Current Assets ÷ Current Liabilities
Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities
What to look for:
Current ratio > 1 (generally safe)
Enough cash to cover short-term obligations
👉 Weak liquidity = risk of cash crunch even if profitable
C. Solvency (Long-term financial survival)
Key ratios:
Debt-to-Equity Ratio
Interest Coverage Ratio
What to look for:
Low or manageable debt
Ability to comfortably pay interest on loans
👉 High debt + low earnings = financial risk
D. Cash Flow (Very important in real investing)
Look at:
Operating Cash Flow
Free Cash Flow (FCF)
What to check:
Positive cash flow from core business
Ability to generate cash (not just accounting profit)
👉 Cash is harder to manipulate than profit
E. Efficiency & Management quality
Asset turnover
Inventory turnover
Consistent capital use
👉 Efficient companies generate more revenue from fewer assets
F. Growth trend (not just current numbers)
Revenue growth
Earnings growth
Dividend history
👉 Strong companies show steady long-term upward trend
2. How to Calculate Earnings Per Share (EPS)
EPS is one of the most important stock metrics because it tells you:
How much profit belongs to each share you own.
Basic EPS Formula
Example
If a company has:
Net profit = ₦10 billion
Shares outstanding = 2 billion shares
Then:
EPS = 10,000,000,000 ÷ 2,000,000,000
EPS = ₦5 per share
Important Variations
1. Basic EPS
Uses current total shares only.
2. Diluted EPS
Includes potential shares from:
Stock options
Convertible bonds
👉 Diluted EPS is more realistic (usually lower than basic EPS)
Why EPS matters
Investors use EPS to:
Compare companies in the same sector
Calculate valuation ratios like P/E ratio
Track earnings growth over time
Simple way to remember financial strength analysis
Think of it like checking a person’s health:
Profitability → Are they earning well?
Liquidity → Can they survive short-term pressure?
Debt → Are they over-borrowed?
Cash flow → Do they actually have money in hand?
Growth → Are they improving or declining?