Financial Indicators (formula and what they measure)

Liquidity

the ability of the business to meet its short-term

debts as they fall due

Profitability

the ability of a business to earn profit as expressed in

relative terms by comparing profit against a base like

sales, assets or owner's equity

Net Profit

Revenues earned - expenses incurred

Return on Investment (ROI)

(Net profit/average total capital) x 100

It measure Net profit earned per dollar of capital invested by the business.

ROI = 60%

It means that for every dollar of capital invested, 6c is retained as net profit.

Debt Ratio

(Total liabilities/Total assets) x 100

The debt ratio measures the proportion/percentage of the firm's assets that are funded by external sources (liabilities)

Debt Ratio = 85%

It means that 85% of the business's total assets are funded by external sources (liabilities).

Return on Asset

(Net Profit/Average total assets) x 100

It measure Net profit earned per dollar of assets controlled by the business.

ROA = 12%

It means that for every dollar of assets under the control of the business, it has earned 12c profit.

Asset Turnover

(Net Sales/Average total assets)

An efficiency indicator that assesses how productively a business has used its assets to earn revenue​

ATO = 0.61times

It means that for every dollar of assets under the business’s control, it has earned revenue of 61 cents

Gross Profit Margin

(Gross Profit/Net Sales) x 100

It measures the amount of gross profit retained by the business from each dollar of sales.

GPM = 40%

It means that for every dollar of Sales revenue earned, 40c was retained as Gross Profit (and 60c was consumed by Cost of Goods Sold).

Net Profit Margin

(Net Profit/Net Sales) x 100

It measures the amount of net profit retained by the business from each dollar of sales.

NPM = 16.7%

This indicates that out of the average sales dollar earned by the business, only 16.7% remained as net profit. This means that 83.3% was consumed by the expenses of running the business.

Working Capital Ratio

(current asset/current liabilities)

The Working Capital Ratio measures the proportion of the firm's current assets to current liabilities

WCR = 1.5 times

It indicates that the business have $1.5 of current assets to every $1 of current liabilities.

Cash Flow Cover

(Net Cash Flow from Operating Activities/Average Current liabilities)

It measures the number of times Net cash flows from Operations is able to cover average current liabilities

CFC = 10 times

It indicates that Net Cash Flows from Operations can cover average Current liabilities 10 times.

Inventory Turnover

(Average Inventory/cost of goods sold) x 365

the average number of days taken to convert inventory into sales.

Accounts Payable Turnover

(Average Accounts Payable/Net Credit Purchases) x 365

It measures the average number of days taken to pay Accounts Payable.

Accounts Receivable Turnover

(Average Accounts Receivable/Net credit Sales) x 365

It measures the average number of days it takes to collect cash from Accounts Receivable.

Non-financial indicators

Firm's relationship with its customers

The suitability of inventory

The firm's relationship with its employees

The state of the economy