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
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