Examples of financial KPIs
A KPI says something important about the financial reality of a company, e.g. the turnover or the profits.
In budget123 you can create your own KPIs, and if you have trouble remembering the exact formula for a KPI, there is help available. We have listed a selection of KPIs below with a brief explanation of what each of them says about your company’s financial situation.
What is Return on equity (ROE)?
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. The formula is:
Return on Equity = Net Income / Shareholder's Equity
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What is Return on sales?
Return on sales is determined by dividing after-tax profits by net sales, where net sales represents the dollar volume of sales less any returns, allowances, and cash discounts. The formula is:
Return on sales = Earnings after tax / Net sales
What is Solvency Ratio?
A key metric used to measure an enterprise’s ability to meet its debt and other obligations. The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities. The lower a company's solvency ratio, the greater the probability that it will default on its debt obligations. The formula is:
Solvency ratio = Net Income (or After-Tax Profit) + Depreciation
/ Short-Term Liabilities + Long-term Liabilities
What is Net profit margin?
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20\% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales. The formula is:
Net profit margin = net profit / revenue
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What is Gross profit margin?
A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. The formula is:
Gross profit margin = Revenue - Cost of goods sold / revenue
What is Current ratio?
Current ratio is the most commonly used measure of liquidity. This ratio is designed to measure the relationship, or balance, between current assets (mainly cash, marketable securities, accounts receivable, and inventories) and current liabilities (mainly accounts payable, current notes payable, and the currently due portion of any long-term debt). One common rule of thumb maintains that this ration should be at least two to one for most business concerns. The formula is:
Current ratio = Current assets / Current liabilities
What is Return on investment?
The profitability ratio, Return on investment, relates after-tax earnings to the corporation's total asset base. The formula is:
Earnings after tax / Total assets
What is Inventory turnover?
A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days." The formula for Inventory turnover is:
Inventory turnover = Sales / Inventory
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What is Accounts payable turnover ratio?
A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. The formula for Accounts payable turnover ratio is:
Accounts payable turnover = Total supplier purchases / Average accounts payable
What is Asset Turnover Ratio?
The amount of sales or revenues generated per dollar of assets. The Asset Turnover ratio is an indicator of the efficiency with which a company is deploying its assets.
Generally speaking, the higher the ratio, the better it is, since it implies the company is generating more revenues per dollar of assets. But since this ratio varies widely from one industry to the next, comparisons are only meaningful when they are made for different companies in the same sector. The formula for Asset turnover is:
Asset Turnover = Sales or Revenues / Total Assets