Finance KPIs to track
In the realm of finance, key performance indicators (KPIs) are essential metrics that provide insights into the financial health and operational efficiency of an organization. These indicators encompass a wide range of financial aspects, including profitability, liquidity, efficiency, and solvency. By analysing KPIs such as net earnings, return on assets, debt-to-equity ratio, operating cash flow, and earnings per share, businesses can evaluate their performance, make informed strategic decisions, and optimize resource allocation.
Why is Finance KPI important?
are crucial as they provide a comprehensive overview of an organization’s financial health and performance. By tracking and measuring their financial activities, these metrics assist firms in managing risks, making well-informed decisions, and ensuring sustainability.
10 Important finance KPIs to track
1. Quick ratio
The quick ratio, also known as the acid-test ratio, is a
financial metricused to evaluate a company’s short-term liquidity and its ability to cover immediate financial obligations with its cash, marketable securities, and accounts receivable are some of the most liquid assets.
This ratio is crucial for businesses to assess their capacity to meet short-term liabilities without relying on the sale of inventory, which may not be easily converted to cash. The quick ratio provides a stringent measure of a company’s financial health, ensuring that it can handle unexpected expenses or financial downturns effectively.
Quick Ratio = (Current assets - Inventory / Current liabilities)
2. Current ratio
A financial indicator, current ratio is used to evaluate a company’s short-term liquidity and ability to pay short-term debts. This ratio provides insights into how well a company can use its assets that are expected to be converted to cash within a year to cover its liabilities due within the same period. By evaluating the current ratio, businesses can make informed decisions on managing working capital more effectively, ensuring they have enough resources to handle day-to-day operations and unexpected financial demands.
Current Ratio = Current assets / Current liabilities
3. Debt To equity ratio
The debt-to-equity ratio is a metric used to assess a company’s capital structure and financial leverage. It is calculated by dividing a company’s total liabilities by its shareholder equity. This ratio helps businesses, investors, and creditors evaluate a company’s solvency, financial stability, and ability to meet its debt obligations.
A high debt-to-equity ratio shows that a company is financing a significant portion of its operations through debt, which may imply higher financial risk.
A lower ratio shows more conservative approach with greater reliance on equity financing.
Debt To Equity Ratio = Debt / Equity
4. Gross burn rate
The gross burn rate is the rate at which a company is consuming its cash reserves or funds to cover its operating expenses before it begins generating positive cash flow from its operations. This metric is crucial for businesses to understand how quickly they are depleting their available cash and to plan accordingly.
Monitoring the gross burn rate, companies can make strategic decisions to manage their cash flow more effectively, optimize spending, and extend their financial runway.
Gross Burn Rate = Expenses / Number of months
5. Asset turnover
The asset turnover rate is a
financial metricused to measure how efficiently a company utilizes its assets to generate revenue. It is calculated by dividing net sales or revenue by average total assets of the business. The ratio that is obtained shows how much money is made in sales for every dollar invested in assets.
A higher asset turnover rate shows that the company is more efficient in using its assets to generate revenue.
Asset Turnover = Net sales / Average assets
6. Earning per share
Earnings per share (EPS) is a important
financial metricthat reflects the portion of a company’s profit allocated to each outstanding share of common stock. It serves as a critical indicator of financial performance, providing stakeholders with valuable insights into how effectively the company is generating earnings on a per-share basis.
A higher EPS shows stronger profitability and can enhance investor confidence, potentially leading to increased demand for the company’s shares in the stock market.
A lower EPS shows challenges in generating sufficient profits relative to the number of outstanding shares.
Earning Per Share = Net Profit – Preferred dividends / Average number of common shares outstanding
7. Price Earnings ratio
The Price-to-Earnings (P/E) ratio is a crucial
financial metricthat compares a company’s current share price to its earnings per share (EPS). This ratio is fundamental in assessing how the market values a company’s stock relative to its profitability. By dividing the current market price of a company’s stock by its EPS, investors and analysts can gauge whether a stock is overvalued, undervalued, or fairly priced in relation to its earnings.
A higher P/E ratio shows that investors expect higher future growth and are willing to pay a premium for the stock.
A lower P/E ratio shows that the stock may be undervalued relative to its earnings, potentially indicating lower growth expectations or concerns about the company’s performance.
Price Earning Ratio = Market price per share / Earning per share
8. Cash conversion cycle
The Cash Conversion Cycle is a
financial metricthat measures how long it takes for a company to convert its investments in inventory and other resources into cash flows from sales. It reflects the time duration between when a business pays for its raw materials and when it receives cash from selling the final products. A shorter cash conversion cycle shows that a company is more efficient in managing its working capital and converting its resources into cash, which is generally favourable. A longer cash conversion cycle shows inefficiencies in inventory management, slow collections from customers, or delayed payments to suppliers, potentially leading to liquidity challenges.
Cash Conversion Cycle = Days inventory outstanding + Days sales outstanding - Days payble outstanding
9. Cash runway
Cash runway refers to the amount of time a company can continue to operate with its current cash balance before it runs out of funds. It is a crucial metric for startups and early-stage companies, indicating their financial sustainability and ability to stay operational without additional financing. Maintaining a sufficient cash runway is essential for business continuity, allowing companies to weather economic downturns, pursue growth opportunities, and attract investors.
Cash Runway = Cash and cash equivalents / Gross burn rate
10. Solvency ratio
The solvency ratio is a
financial metricused to assess a company’s ability to meet its long-term debt obligations. It measures the proportion of a company’s assets that are financed by equity versus debt. In essence, the solvency ratio indicates the extent to which a company’s assets are sufficient to cover its liabilities, including both short-term and long-term debt.
A higher solvency ratio shows a greater degree of financial stability and indicates that a company is better equipped to weather financial challenges and honor its debt obligations.
A lower solvency ratio shows higher financial risk, as it implies that a larger portion of the company’s assets is funded by debt rather than equity.