Preview

Business Financial Metrics

Good Essays
Open Document
Open Document
775 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Business Financial Metrics
A business metric is also known as a financial ratio or performance indicator. Financial ratios lift the veil on a firm’s operating prowess, telling investors how the company navigates the doldrums of a bad company. There are four common types of performance indicators in modern-day financial analysis: Liquidity, Efficiency, Profitability, and Safety.
Liquidity Ratios
Working Capital
Formula: Total Current Assets – Total Current Liabilities
The working capital metric is a measure of both a company’s efficiency and its short term financial health. Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets.
Current Ratio
Formula: Total Current Assets / Total Current Liabilities
Generally this metric measures the overall liquidity position of a company. It is certainly not a perfect barometer, but good enough. Watch for big decreases in this number over time. Make sure the accounts listed in current assets are collectible.
Quick Ratio
Formula: (Cash – Accounts Receivable) / Total Current Liabilities
This is another good indicator of liquidity although by itself, it is not a perfect one. If there are receivable accounts included in the numerator, they should be collectible. Look at the length of time the company has to pay the amount listed in the denominator.
Inventory Days
Formula: (Inventory / COGS) * 365
Inventory days show how much inventory (in days) is on hand. It indicates how quick a company can respond to market and/or product changes. Not all companies have inventory for the metric.
Accounts Receivable Days
Formula: (Account Receivable / Sales) * 365
Accounts Receivable shows how much inventory (in days) is on hand. It indicates how quick a company responds to market and/or product can change. Not all companies have inventory for the metric.
Accounts Payable Days

You May Also Find These Documents Helpful

  • Good Essays

    FINANCIAL RATIOS

    • 616 Words
    • 4 Pages

    Financial ratios are indicators of a company’s performance as discernable from the company’s Balance Sheet and income Statement. We will discuss some of the simple ratios of a company and talk about their significance.…

    • 616 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    This ratio shows the company how quickly accounts receivable are paid. A high turnover generally means more cash on hand for the company.…

    • 572 Words
    • 3 Pages
    Satisfactory Essays
  • Better Essays

    Cango Financial Ananlysis

    • 1075 Words
    • 5 Pages

    The company’s capital structure is inefficient which a problematic situation is not as such if it is temporary. Liquidity ratios used to analyze the financial health of a business includes the current ratio and acid test ratio. CanGo has a current ratio of 5.39. This is an exceptionally high figure. A current ratio is calculated by dividing the current assets with current liabilities. This is a measure of company’s short-term liquidity position and assesses its ability to meet its short term obligations through its current assets. Generally if the ratio is high, it’s an indicator of a good liquidity position. The ideal situation is where current ratio is greater than 1 and less than 2. However, if it exceeds 2, this might result in inefficiencies. It shows that company’s assets are lying idle and the funds are not being utilized effectively. So CanGo should be paying attention in allocating its assets properly.…

    • 1075 Words
    • 5 Pages
    Better Essays
  • Good Essays

    Acc 400

    • 795 Words
    • 4 Pages

    * Inventory – Goods or material in-stock or under processing which can be sold and converted into cash…

    • 795 Words
    • 4 Pages
    Good Essays
  • Powerful Essays

    4. Accounts receivable represent the amount of cash owed to the company by its customers from the sale of products or services on account.…

    • 14932 Words
    • 105 Pages
    Powerful Essays
  • Better Essays

    Days of working capital is the amount of net operating working capital required per dollar of daily sales.…

    • 9177 Words
    • 45 Pages
    Better Essays
  • Good Essays

    Current assets are a key financial source to Tesco’s business. Current assets are cash and other things such as inventory that can be converted into cash easily. An asset that will be in use for less than a year is a current asset as they transfer into money once sold. Tesco’s stock in their stores is a current asset as they transfer into money once sold. An essential thing for Tesco to ensure is to ensure that their assets aren’t lower than their current liabilities (debt) as this may force Tesco to close as they want to be able to pay off their debts.…

    • 991 Words
    • 4 Pages
    Good Essays
  • Better Essays

    Minimizing Working Capital

    • 1200 Words
    • 5 Pages

    Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable, inventory).…

    • 1200 Words
    • 5 Pages
    Better Essays
  • Good Essays

    4. Inventories are materials or goods used by a business that are considered current assets because the company expects to use them up within one year.…

    • 749 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    According to this concept the total current assets are termed as the gross working capital or circulating capital. Total current assets include, cash, marketable securities, accounts receivables, inventory, prepaid expenses, advance payment of tax etc. this concept also called as quantitative or broader approach. TO quote Weston and Brigham , “ gross working capital refers to firms investments in short term assets such as cash, short term securities, accounts receivables and inventories” . According to Walker, “ use of this concept is helpful in providing for the current amount of working capital at the right time so that the firm is able to realize the greatest return on investment” . The supporters of this concept like Mead, field, and baker and Malott, argue that the management is very much concerned with the total current assets as they constituent the total funds available for operating process…

    • 513 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    Generally working capital is a measure of both a company's efficiency and its short-term financial health. The working capital is…

    • 5538 Words
    • 23 Pages
    Powerful Essays
  • Better Essays

    Profits with No Cash

    • 1521 Words
    • 5 Pages

    Changes in inventory also affect inventory in some ways. For example, if the business buys more stocks, it means that that its cash decreases so it may account…

    • 1521 Words
    • 5 Pages
    Better Essays
  • Good Essays

    Inventory is the total amount of goods or materials contained in a store or factory at any given time. The staffs need to know the precise number of items on their shelves and storage areas in order to place orders or control losses. They need also to know how many units of their products are available for patient’s reservation. All of these businesses rely on an inventory system to provide answers.…

    • 5395 Words
    • 22 Pages
    Good Essays
  • Satisfactory Essays

    Financial Ratio Formulae

    • 253 Words
    • 2 Pages

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:…

    • 253 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    “A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.” Source: (http://www.investopedia.com/terms/p/profitabilityratios.asp). Commonly used profitability ratios are shown below,…

    • 1585 Words
    • 7 Pages
    Good Essays