Notable corporate financial indicators for managers and investors
Financial analysis is an important activity in the process of business management and investment. In particular, business financial indicators are intuitive numbers, showing the situation of business activities. So what are the notable financial indicators and what do they mean? Let's find out with Dealnew in the article below to have a more intuitive view.
1. Corporate financial indicators
1.1. Concept of corporate financial index
Financial ratios of a business are numbers calculated based on the ratio between financial/business indicators compared to each other.
These indicators help us better understand the financial situation of the business. They are often used for comparison and allow business owners to evaluate and measure the relationship between financial factors. They reflect in detail the strengths and weaknesses of the business, thereby helping in making business management decisions.
Understanding and monitoring financial indicators will help managers operate the business more effectively and help investors make reasonable decisions to buy and sell shares of that business.
1.2. Application of corporate financial indicators
Enterprises with effective financial management will be able to mobilize capital effectively, use capital reasonably, thereby increasing profits and enhancing value for shareholders.
Monitoring and analyzing financial indicators helps enterprises carry out effective management and planning activities, including activities such as:
- Financial planning and forecasting: Forecast capital needs, plan investment and capital mobilization activities, and allocate capital effectively.
- Cash flow management: Track cash flow, ensure the business has enough resources to pay expenses and financial obligations.
- Investment decision making: Analyze potential investment opportunities, assess risks and returns, and select investments that will bring the highest return to the business.
- Risk Management: Identify, assess and manage financial risks that may affect the business operations of the enterprise.
- Optimizing capital structure: Determine the appropriate ratio of debt and equity to minimize the cost of capital and increase profits for the business.
- Analyze and evaluate performance: Use financial indicators to evaluate the performance of the business, thereby proposing improvement measures.
At the same time, for investors, monitoring a business's financial reports and indicators will help them assess its current situation and growth potential to decide whether to invest in that business or not.
Read more: 7 Core Principles of Financial Management for Any Bussiness
2. Notable corporate financial indicators
There are many different financial ratios used to evaluate the performance of a business. However, the following ratios are considered to be the most important and noteworthy:
2.1. Liquidity index group
Liquidity index shows the ability to pay short-term debts, ensuring the financial capacity of the enterprise:
a, Current ratio: Measures the ability of the enterprise to pay short-term debts with current assets. The higher the ratio, the better the ability of the enterprise to pay short-term debts.
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
b, Quick ratio: Similar to the current ratio, but excludes inventory from the calculation. This ratio assesses the ability of a business to pay short-term debts without selling inventory.
QUICK RATIO = ( CURRENT ASSETS - INVENTORY) / CURRENT LIABILITIES
Liquidity indexes for different industry groups and products also have differences depending on cash needs and fast or slow capital turnover.
2.2. Performance index group
These are indicators to evaluate the business's ability to operate and optimize production and business:
a, Inventory turnover ratio: Measures the speed at which a business sells its inventory. The higher the turnover, the more effectively the business manages its inventory.
INVENTORY TURNOVER = NET SALES / AVERAGE INVENTORY VALUE
b, Total assets turnover ratio: Measures the efficiency of a business's use of assets. The higher the turnover, the more revenue the business generates from each invested capital.
ASSET TURNOVER = NET SALES / AVERAGE TOTAL ASSETS
2.3. Profitability index group
Profitability ratios give investors a visual representation of a company's profit potential:
a, Gross profit margin: Measures the company's gross profit relative to its revenue. The higher the ratio, the more profit the company makes from each dollar of sales.
GROSS PROFIT MARGIN ON SALES = ( GROSS PROFIT / NET SALES) X 100
b, Net profit margin: Measures the ratio of a company's net profit to its revenue. The higher the ratio, the more efficient the company is in using capital and generating profits.
NET PROFIT MARGIN ON SALES = ( NET PROFIT / NET SALES) X 100%
2.4. Debt payment ability index group
Debt-to-equity ratio: Measures the level of debt of the enterprise compared to the equity. The higher the ratio, the more dependent the enterprise is on borrowed capital .
DEBT TO EQUITY RATIO = LIABILITIES / EQUITY
b, Interest expense to EBIT: Measures the company's ability to pay interest. The higher the ratio, the more difficult it is for the company to pay interest.
INTEREST ON EBIT RATIO = INTEREST EXPENSE / EARNINGS BEFORE INTEREST AND TAXES
These are some of the key financial indicators that managers and investors closely monitor to assess a company's financial health, profitability, and growth potential:
Indicator | Description |
---|---|
Revenue | The total amount of income generated from sales of products or services. An important measure of a company's top-line growth. |
Gross Profit | Revenue minus the cost of goods sold. Indicates the profitability of a company's core business activities. |
Gross Margin | Gross profit divided by revenue. Represents the percentage of revenue that becomes gross profit. |
Operating Profit | Profit from a company's core business operations, excluding interest and taxes. Provides insight into operational efficiency. |
Operating Margin | Operating profit divided by revenue. Measures a company's operating profitability. |
Net Income | The bottom-line profit after all expenses, interest, and taxes have been deducted. Represents the overall profitability. |
Earnings per Share (EPS) | Net income divided by the number of outstanding shares. Indicates the profitability per share. |
Return on Equity (ROE) | Net income divided by shareholders' equity. Measures how effectively a company is using its equity to generate profits. |
Debt-to-Equity Ratio | Total liabilities divided by total shareholders' equity. Indicates a company's financial leverage and risk profile. |
Current Ratio | Current assets divided by current liabilities. Measures a company's ability to pay short-term obligations. |
Free Cash Flow | Cash flow from operations minus capital expenditures. Represents the cash a company has available for other purposes. |
In addition, there are many other important financial indicators, depending on many factors such as: business industry, business characteristics or operating stage.
Enterprises need to choose appropriate indicators to evaluate their own performance and compare with businesses in the same industry.
Although they can be calculated and used easily, these indicators cannot completely replace business experience. Hopefully, the information in the article from Dealnew has helped you understand more about the role of business financial indicators.
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