By learning financial KPIs, you can understand how your organisation is performing financially. You can then use this knowledge to adjust your department or team’s goals and contribute to strategic objectives. Here are 12 financial KPIs managers should understand.
Gross Profit Margin
Gross profit margin is a profitability ratio that measures the percentage of revenue left after subtracting the cost of goods sold, or in the case of a financial adviser cost of service. The cost of goods sold refers to the direct cost of production and does not include operating expenses, interest, or taxes. In other words, gross profit margin is a measure of profitability, specifically for a product or item line, without accounting for overheads.
GROSS PROFIT MARGIN = (REVENUE – COST OF SALES) / REVENUE * 100
Net Profit Margin
Net profit margin is a profitability ratio that measures the percentage of revenue and other income left after subtracting all costs for the business, including costs of goods sold, operating expenses, interest, and taxes. Net profit margin differs from gross profit margin as a measure of profitability for the business in general, taking into account not only the cost of goods sold but all other related expenses.
NET PROFIT MARGIN = NET PROFIT / REVENUE * 100
Working Capital
Working capital is a measure of the business’s available operating liquidity, which can be used to fund day-to-day
operations.
WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES
Current Ratio
Current ratio is a liquidity ratio that helps you understand whether the business can pay its short-term obligations—
that is, obligations due within one year—with its current assets and liabilities.
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
Quick Ratio
The quick ratio, also known as an acid test ratio, is another type of liquidity ratio that measures a business’s ability to handle short-term obligations. The quick ratio uses only highly liquid current assets in its numerator, such as cash, marketable securities, and accounts receivables. The assumption is that certain current assets, like inventory, are not necessarily easy to turn into cash.
QUICK RATIO = (CURRENT ASSETS – INVENTORY) / CURRENT LIABILITIES
Leverage
Financial leverage, also known as the equity multiplier, refers to the use of debt to buy assets. If all the assets are financed by equity, the multiplier is one. As debt increases, the multiplier increases from one, demonstrating the leverage impact of the debt and, ultimately, increasing the business risk.
LEVERAGE = TOTAL ASSETS / TOTAL EQUITY
Debt-to-Equity Ratio
The debt-to-equity ratio is a solvency ratio that measures how much a company finances itself using equity versus debt. This ratio provides insight into the solvency of the business by reflecting the ability of shareholder equity to cover all debt in the event of a business downturn.
DEBT-TO-EQUITY RATIO = TOTAL DEBT / TOTAL EQUITY
Inventory Turnover
Inventory turnover is an efficiency ratio that measures how many times per accounting period the company sold its entire inventory. It gives insight into whether a company has excessive inventory relative to its sales levels.
INVENTORY TURNOVER = COST OF GOODS SOLD / (BEGINNING INVENTORY + ENDING INVENTORY / 2)
Total Asset Turnover
Total asset turnover is a ratio that measures how efficiently a company uses its assets to generate revenue. The higher the turnover ratio, the better the company’s performance.
TOTAL ASSET TURNOVER = REVENUE / (BEGINNING TOTAL ASSETS + ENDING TOTAL ASSETS / 2)
Return on Equity
Return on equity, more commonly displayed as ROE, is a profitability ratio measured by dividing net profit over shareholders’ equity. It indicates how well the business can utilise equity investments to earn profit for investors.
ROE = NET PROFIT / (BEGINNING EQUITY + ENDING EQUITY) / 2
Return on Assets
Return on assets, or ROA, is another profitability ratio similar to ROE. It’s measured by dividing net profit by the company’s average assets. It’s an indicator of how well the company is managing its available resources and assets to net higher profits.
ROA = NET PROFIT / (BEGINNING TOTAL ASSETS + ENDING TOTAL ASSETS) / 2
