Accounts Payable Days - A measure of how long it takes for the business to pay its creditors. A stable higher number of days is generally an indicator of good cash management. A longer time taken to pay creditors has a positive impact on Cash Flow. But an excessive lengthening in this ratio could indicate a problem with sufficiency of working capital to pay creditors.
Accounts Payable Days = Accounts Payable * Period Length / Cost of Sales
Accounts Receivable Days - A measure of how long it takes for the business to collect the amounts due from customers. A lower number indicates that it takes the business fewer days to collect its accounts receivable. A shorter time to collect debtors has a positive impact on Cash Flow. A higher number indicates that it takes longer to collect its accounts receivable.
Accounts Receivable Days = Accounts Receivable * Period Length / Revenue
Activity Ratio - A measure of the efficiency or effectiveness with which the business manages its resources or assets. This measure indicates the speed with which Net Operating Assets (Equity + Debt) are converted or turned into sales. This can be improved by optimising balance sheet efficiency, ie. by reducing the investment in working capital, selling-off any unused assets or by seeking ways to maximise the use of assets.
Activity Ratio = Annualised Revenue / Total Invested Capital
Asset Change - A measure of the percentage change in Total Assets for the period.
Asset Change = (Total Assets - Opening Total Assets) / Opening Total Assets * 100
Asset Turnover - A measure of how effectively the business has used its assets to generate revenue. Ways to improve this metric include increasing sales using the same asset base, using capital more efficiently, and/or improve cash management by reducing inventory and receivables.
Asset Turnover = Annualised Revenue / Total Assets
Breakeven Margin of Safety - The breakeven safety margin represents the gap between the actual revenue level and the breakeven point. In other words, the amount by which revenue can drop before losses begin to be incurred. The higher the margin of safety, the lower the risk of incurring losses.
Breakeven Margin of Safety = Revenue - Breakeven Sales Volume
Cash Conversion Cycle - A measure of the length of time between purchase of raw materials and the collection of accounts receivable from customers. The Cash Conversion Cycle measures the time between outlay of cash and cash recovery. A shorter cycle minimises the time that working capital is tied up in the operating cycle of the business.
Cash Conversion Cycle = Inventory Days + Accounts Receivable Days + Work in Progress Days - Accounts Payable Days
Cash Flow Adequacy Ratio - A measure of the ability of the business to cover total debt with cash flow from operations. A higher result, indicates that the company is in a better position to service its total debt.
Cash Flow Adequacy Ratio = Annualised Operating Cash Flow / Total Debt * 100
Cash Flow Coverage - A measure of the ability to service interest payments from operating cash flows. A lower result may indicate that the cash flow generated from the company's operations will be insufficient to cover interest payments.
Cash Flow Coverage = Operating Cash Flow / (Interest Expenses - Interest Income)
Cash Flow Margin - A measure of the company’s ability to turn sales into cash.
Cash Flow Margin = Operating Cash Flow / Revenue * 100
Cash on Hand - A measure of the cash and cash equivalents in actual possession by the company at a particular time. Insufficient cash reserves may result in an inability to pay creditors and cover current liabilities.
Cash on Hand = Cash & Equivalents
The Cash Ratio - measures the availability of cash and cash equivalents there are to cover current liabilities. Few businesses have sufficient cash and cash equivalents to fully cover current liabilities. Accordingly, a cash ratio of less than 1 is often acceptable.
Cash Ratio = Cash & Equivalents / Total Current Liabilities
COS Change - A measure of the percentage change in total cost of sales for the period. A significant increase in cost of sales may indicate the eroding of margins and should prompt action. While growing revenues, management need to monitor expense growth to ensure disciplined growth.
COS Change = (Cost of Sales - Prior Cost of Sales) / Prior Cost of Sales * 100
Current Ratio - A measure of liquidity. This measure compares the totals of the current assets and current liabilities. The higher the current ratio, the greater the 'cushion' between current obligations and the business's ability to pay them. Generally a current ratio of 2 or more is an indicator of good short-term financial strength. In other words, the current assets of the business should be at least double the current liabilities.
Current Ratio = Total Current Assets / Total Current Liabilities
Debt Payback - A measure of the number of years for the business to repay total debt from after tax earnings. The lower result indicates that the company is in a better position to rapidly repay its debt.
Debt Payback = Total Debt / (Annualised Earnings After Tax)
Debt Service Ratio - A measure of the number of years for the business to repay total debt from free cash flow. The lower result indicates that the company is in a better position to rapidly repay its debt.
Debt Service Ratio = Total Debt / (Annualised Free Cash Flow)
Debt to Equity - A measure of the proportion of funds that have either been invested by the owners (equity) or borrowed (debt) and used by the business to finance its assets. An appropriate mix of debt financing and equity financing will vary for each industry and business. Management are responsible to ensure that an appropriate balance between the two sources of financing is maintained. To improve this ratio, management can seek to internally generate profits and retain these profits to fund future growth, rather than borrowing additional funds.
Debt to Equity = Total Debt / Total Equity * 100
Debt to Total Assets - A measure of the proportion of the business's assets that are financed through debt.
Debt to Total Assets = Total Debt / Total Assets * 100
EBIT Growth - A measure of the percentage change in EBIT for the period. A combination of growth in revenues and growth in profits presents a balanced measure of growth.
EBIT Growth = (Earnings Before Interest & Tax - Prior Earnings Before Interest & Tax) / Prior Earnings Before Interest & Tax * 100
Economic Profit - This measure is underpinned by the concept that a business only adds value for its shareholders if it makes a profit in excess of its cost of capital. Economic profit is calculated as the amount by which profits exceed or fall short of the required return for shareholders. A positive economic profit represents that the business is creating shareholder value. A negative economic profit means that the business is destroying shareholder value.
Economic Profit = Annualised NOPAT - (Total Invested Capital * WACC / 100)
Equity Change - A measure of the percentage change in Total Equity for the period.
Equity Change = (Total Equity - Opening Total Equity) / Opening Total Equity * 100
Equity to Assets - A measure of the proportion of the business's assets that are financed by shareholder's equity.
Equity to Assets = Total Equity / Total Assets * 100
Expense Change - A measure of the percentage change in total expenses for the period. While growing revenues, management need to monitor expenses. A significant increase in expenses may indicate the eroding of margins and should prompt action.
Expense Change = (Expenses - Prior Expenses) / Prior Expenses * 100
Expense-to-Revenue Ratio - A measure of how efficiently the business is conducting its operations. While growing revenues, management need to monitor the change in expenses. A significant rise in the expense-to-revenue ratio may indicate the eroding of margins and should prompt action.
Expense-to-Revenue Ratio = (Cost of Sales + Expenses) / Revenue * 100
Fixed Asset Turnover - A measure of how effectively the business has used its fixed assets to generate revenue. Ways to improve this metric include using fixed assets more efficiently and/or selling-off any unused fixed assets.
Fixed Asset Turnover = Annualised Revenue / Fixed Assets
Free Cash Flow - Free cash flow is the cash generated by the business, after paying its expenses and investing for future growth. It is the cash left after subtracting capital expenditures from operating cash flow. The term “free cash flow” is used because this cash is free to be paid back to the suppliers of capital.
Free Cash Flow = Operating Cash Flow - (Total Non - Current Assets - Opening Total Non - Current Assets + Depreciation + Depreciation & Amortisation)
Gross Margin Return on Inventory - A measure of the average amount that the inventory returns above its cost. GMROI assists to monitor the investment in inventory and the resulting gross margin earned by this investment. A result higher than 100% indicates that the business is selling its products for more than what it costs to acquire.
Gross Margin Return on Inventory = Annualised Gross Profit / ((Inventory + Opening Inventory) / 2) * 100
Gross Profit Growth - A measure of the percentage change in gross profit for the period.
Gross Profit Growth = (Gross Profit - Prior Gross Profit) / Prior Gross Profit * 100
Gross Profit Margin - A measure of the proportion of revenue that is left after deducting all costs directly related to the sales. The gross profit serves as the source for paying operating expenses. The gross profit margin can be further improved by improving price, volume and cost of sales management.
Gross Profit Margin = Gross Profit / Revenue * 100
Growth Equilibrium - A measure of the self-funding rate of growth the business can sustain from its retained earnings (assuming a constant debt-to-equity ratio). The growth equilibrium is also commonly known as the sustainable growth rate. When the actual growth rate is less than the sustainable growth rate this indicates that the business has sufficient cash to fund its own growth. When the actual growth rate is above the sustainable this indicates that only a portion of growth is being funded by retained earnings. Additional funding will be required from outside sources to fund the deficit.
Growth Equilibrium = Annualised Retained Income / Opening Total Equity * 100
Interest Cover - A measure of the ability to service its interest payments from the profits earned by the business. A result of more than 2 is generally considered to be safe, but businesses with volatile earnings may require a higher level of cover. A lower result indicates that the business is more burdened by debt expense. A lower result may also identify the potential risk that profits will be insufficient to cover interest payments. A high result may indicate that the business can easily meet its interest obligations.
Interest Cover = Earnings Before Interest & Tax / (Interest Expenses - Interest Income)
Inventory Days - A measure of how efficiently the business converts inventory into sales. A lower number of days is generally an indicator of good inventory management. A shorter time holding inventory has a positive impact on cash flow. But a low result can also mean there is a shortage of inventory. Conversely, a high result may indicate overstocking.
Inventory Days = Inventory * Period Length / Cost of Sales
Net Cash Flow - Net cash flow is the cash flow remaining after operating, investing and financing activities. Financing activities may include cash outflows such as interest payments to lenders or dividend payments to shareholders.
Net Cash Flow = Free Cash Flow - Net Interest + (Net Interest * (Tax Rate / 100)) - Dividends - Adjustments + (Other Non - Current Liabilities - Opening Other Non - Current Liabilities) + (Other Equity - Opening Other Equity) + (Retained Earnings - Opening Retained Earnings) + (Current Earnings - Opening Current Earnings) - Retained Income
Net Debt Change - A measure of the percentage change in Net Debt for the period. Net Debt is calculated as Total Debt (short-term and long-term debt) less Cash & Equivalents.
Net Debt Change = (Net Debt - Opening Net Debt) / Opening Net Debt * 100
Net Income Growth - A measure of the percentage change in Net Income for the period. Typically growth in Net Income is driven by growth in revenues and/or productivity.
Net Income Growth = (Net Income - Prior Net Income) / Prior Net Income * 100
Net Profit After Tax Margin - A measure of the proportion of revenue that is left after all expenses have been paid. For this period, the Net Profit After Tax margin is below the required target. This may indicate cost blowouts that require efficiency improvements.
Net Profit After Tax Margin = Earnings After Tax / Revenue * 100
Net Variable Cash Flow - A measure of the additional cash that will either be generated or used up by the next $100 of products or services that the business sells. If the Net Variable Cash Flow is positive then for every additional $100 of revenue the business will generate cash. If the Net Variable Cash Flow is negative then for every additional $100 of revenue the business will require additional cash funding.
Net Variable Cash Flow = (Annualised Revenue - Annualised Variable COS - Annualised Variable Expenses - Operating Working Capital) / (Annualised Revenue) * 100
Operating Cash Flow - Operating cash flow is simply the cash generated by the operating activities of the business. Operating activities include the production, sales and delivery of the company’s product and/or services as well as collecting payment from its customers and making payment to suppliers.
Operating Cash Flow = Earnings Before Interest, Tax, Depn & Amort. - Tax Expenses + (Deferred Taxes - Opening Deferred Taxes) - (Non - cash Working Capital - Opening Non - cash Working Capital) - (Net Interest * (Tax Rate / 100))
Operating Cash Flow to Current Liabilities - Operating Cash Flow to Current Liabilities is a measure of how well current liabilities are covered by the cash flow generated from operational activities. This metric provides a useful indicator of a business's liquidity in the short-term. Using cash flow rather than profit provides a better indication of liquidity because cash is means by which short-term obligations are normally paid.
Operating Cash Flow to Current Liabilities = Annualised Operating Cash Flow / Total Current Liabilities
Operating Cash Flow to Net Income - A measure of the company’s ability to turn Net Income in to Operating Cash Flow.
Operating Cash Flow to Net Income = Operating Cash Flow / Net Income * 100
Operating Profit Growth - A measure of the percentage change in operating profit for the period.
Operating Profit Growth = (Operating Profit - Prior Operating Profit) / Prior Operating Profit * 100
Operating Profit Margin - A measure of the proportion of revenue that is left after deducting all operating expenses. This reveals the operating efficiency of the business. The operating profit margin can be further improved by improving price, volume, cost of sales and expense management.
Operating Profit Margin = Operating Profit / Revenue * 100
Profitability Ratio - A measure of the proportion of revenue that is left after deducting all expenses. This excludes finance costs and tax expenses. The profitability ratio can be further improved by improving price, volume, cost and expense management.
Profitability Ratio = Earnings Before Interest & Tax / Revenue * 100
Quick Ratio - The Quick Ratio measures the availability of assets which can quickly be converted into cash to cover current liabilities. Inventory and other less liquid current assets are excluded from this calculation. The Quick Ratio is a measure of the ability to pay short-term creditors immediately from liquid assets. A quick ratio of 1:1 or more is considered 'safe'.
Quick Ratio = (Cash & Equivalents + Accounts Receivable) / Total Current Liabilities
Return on Assets - A measure of how effectively the business has used its assets to generate profits. Return on Assets is a performance measure which is independent of the business's capital structure. The higher the ratio the greater the return on assets.
Return on Assets = Annualised Earnings Before Interest & Tax / Total Assets * 100
Return on Capital Employed - A measure of the efficiency and profitability of capital investment (ie. funds provided by shareholders & lenders). ROCE monitors the relationship between the capital ('inputs') used by the business and the earnings ('outputs') generated by the business. ROCE is arguably one of the most important performance measures. The higher the result the greater the return to providers of capital.
Return on Capital Employed = Annualised Earnings Before Interest & Tax / Total Invested Capital * 100
Return on Equity - A measure of how effectively the business has used the resources provided by its owners to generate profits. The higher the ratio the greater the rate of return for shareholders.
Return on Equity = Annualised Net Income / Opening Total Equity * 100
Revenue Growth - A measure of the percentage change in revenue for the period. Management should ensure that revenues increase at rates higher than general economic growth rates (ie. inflation).
Revenue Growth = (Revenue - Prior Revenue) / Prior Revenue * 100
Total Revenue - A measure of the total amount of money received by the company for goods sold or services provided. Strategies to improve revenue may include increasing prices, increasing the volume of sales through marketing initiatives or finding alternative sources of income.
Total Revenue = Revenue
Work in Progress Days - A measure of the number of days, on average, that jobs are in progress prior to invoicing. A lower number of days is generally an indicator of good WIP management. A high result may indicate poor workflow management and/or job turnaround. Conversely, a low result may indicate efficient and timely service.
Work in Progress Days = Work in Progress * Period Length / Cost of Sales
Working Capital Absorption - A measure of the adequacy of working capital to support sales activity. This measure indicates the investment made in working capital for each unit of revenue. The trend of this ratio is particularly useful for growing businesses. If sales increase rapidly but working capital levels remain constant, the business may be at risk that insufficient working capital is available to support this growth. Moreover, if the result for this metric is greater than the Gross Profit Margin %, then for every additional unit of Revenue generated, additional cash will be required.
Working Capital Absorption = Operating Working Capital / (Annualised Revenue) * 100