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Overview: Financial key figures

  • Knowledge
Kristoffer Ekelund Gerdes & Astrid Dam Schiøller 1 Jul 2019

Like many other companies, Risika uses of a lot of key figures, to keep track of the status of customers, business partners and competing companies. These key figures can give great insight into how well a company is doing. Although Risika has collected all the important key figures on the platform, you should be given the opportunity to calculate the key figures yourself. Therefore, we have made a list of the most important figures.


Solvency ratio

$$Solvency\; ratio = {Equity \over Assets}$$

The company’s ability to carry greater losses. Financing is typically done with a combination of equity and debt. A low figure is typically bad, since it means proportionally more debt, and thus large losses cannot be paid off with equity.

 

Debt ratio

$$Debt\; ratio = {Debt \over Assets}$$

The key figure is defined as the ratio of total debt to total assets. This can be interpreted as the share of the company’s assets, financed by debt. If the ratio is above 1, it means that a significant part of the debt is financed by assets. In other words, the company has more obligations than assets. A high debt ratio also indicates that a company may be at risk of default on loans, if the interest rates suddenly increases. A debt ratio below 1, means that a larger part of the company’s assets are financed by equity.

 

Liquidity ratio

$$Liquidity\; ratio = {Current\; assets * 100 \over Current\; liabilities}$$

The company’s ability to pay bills and repay debt. The figure is calculated as the ratio between the “easy-to-sell assets” (liquid assets/cash, inventory items etc.) and the current liabilities. The higher the liquidity ratio the better, as the company are more able to meet liabilities and pay current expenses.

 

Debt-to-equity ratio

$$Debt-to-equity\; ratio = {LB + CL \over Equity}$$
LB = Long term debt
CL = Current liabilities

The company’s ability to resist major internal or external crises, as the company pays interest on the debt through its cash flow, which is likely to be much lower in the event of an economic downturn. The figure describes the level of a company’s debt in relation to the equity percentage. The lower debt-to-equity ratio, the better, and it should preferably be under 100%.

 

Return on assets

$$Return on assets = {Primary\;  income\over Balance\;  sheet}$$

The company’s ability to create investment returns for the investors. The earnings are compared to the total amount invested in the company, which gives the key figure in percentages. The higher the return on assets, the better, as it shows that one can run a profitable business. One should be a bit careful with comparing this figure across industries, as the definition of what a “high” figure constitutes, can vary greatly across industries.

 

Return on equity

$$Return\; on\; equity = {Net\; income \over Equity}$$

The company’s ability to generate sound returns. The figure shows how much of the investment capital has been returned, once the interest costs are paid. If the figure is higher than the ROI, the company gets more out of the capital, than what it costs to loan.

 

Interest coverage ratio

$$Interest\; coverage\; ratio = {EBIT \over Interest\; paid}$$

The company’s ability to repay interest on debt. The figure describes the ratio between the gross earning and the interest costs. If this figure falls below 150%, it typically is a very bad sign, as it is doubtful that the company will survive will a smaller dip in earnings.

 

Asset turnover ratio

$$Asset\; turnover\; ratio = {Net\; revenue \over Average\; assets}$$

The turnover rate of the assets shows the company’s ability to adjust capital. In the real world, companies often experience that in times of crises, it is difficult to reduce the amount of assets, to the same extent as revenue, and therefore it is often a sign of good management, if the turnover rate of the assets is maintained (or increases) during periods of declining revenue.

 

Receivables turnover ratio

$$Receivables\; turnover\; ratio = {Revenue \over Debtors}$$

The receivables turnover ratio measures how fast the debtors pay back the amounts they are due. If the receivable turnover ratio is high, it is positive, since the debtors pay relatively quickly – meaning they have a short credit period.

 

Accounts payable turnover ratio

$$Accounts\; payable\; turnover\; ratio = {Purchase\; of\; goods \over Creditors}$$

The accounts payable turnover ratio tells us for how long the company has credit time with the creditors. It is positive for a company if the accounts payable turnover ratio is low, since the company thereby will keep its money within the company for as long as possible

 

Inventory turnover ratio

$$Inventory\; turnover\; ratio = {Product\; consumption \over Average\; inventory}$$

The inventory turnover ratio shows how many times in a year, the company can convert, i.e. “sell” its inventory. By calculating the inventory turnover ratio, a company can ascertain whether it is the storage time, or a change in activity that causes a possible change in the size of stock. If it is the storage time that has increased, it should be done to improve the company’s delivery service.

 

Capacity ratio

$$Capacity\; ratio = {Gross\; profit \over Gross\; profit - EBIT}$$

The capacity ratio expresses the profitability of the capacity effort that has been available during the period, i.e. how good the company has been at exploiting the capacity. If the key figure = 1, the capacity costs can only just be covered, but there will be nothing left to cover the financing costs.

 

Profit ratio

EN: Profit ratio

$$Profit\; ratio = {Profit \over Income}$$

The profit ratio shows, how big a part of the company’s net revenue is left as profit, when both the variable costs and capacity costs have been covered. In other words, the key figure describes the company’s ability to make a profit.

 

Net profit ratio

$$Net\; profit\; ratio = {Net\; income * 100 \over Net\; revenue}$$

By calculating the net profit ratio, one can find out, how much of the income goes to interest expenses and profit. The key figure is used to compare the effectiveness of a company, in relation to other companies. The financing of the company is not considered, since the profitability is the most important factor of the benchmark. This key figure is most often shown in percentages.

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