Explanation of KPIs
This section describes the KPIs shown in the Financial Ratio Analysis report.
1. Liquidity indicates to what extent a company can meet its current payment obligations.
◦ Current ratioprovides insight into whether the (short-term) debts can be paid from the current assets. The calculation is as follows:
Current ratio = Current assets / Short-term liabilities
Current assets = Inventories + Work in progress + Other current assets + Cash and cash equivalents.
Short-term liabilities = Short-term debt + Dividends payable
◦ Quick ratio also indicates the extent to which a company is able to pay (short-term) debts from its current assets. Only in the case of the quick ratio, the inventories do not count, because you cannot immediately (entirely) convert them into money. The calculation is as follows:
Quick ratio = (Current assets - Inventories) / Short-term liabilities
Current assets = Inventories + Work in progress + Other current assets + Cash and cash equivalents.
Short-term liabilities = Short-term debt + Dividends payable
◦ Cash ratio provides insight into whether the (short-term) debts can be paid from the cash and cash equivalents. The calculation is as follows:
Cash ratio = Cash and cash equivalents / Short-term liabilities
Short-term liabilities = Short-term debt + Dividends payable
◦ Net working capital to assets is the capital you work with on a daily basis. It is the difference between the current assets and the Short-term liabilities on the balance sheet of a company. This amount is divided by the total assets. The calculation is as follows:
Net working capital = (Current assets -/- Short-term liabilities)/Assets
Current assets = Inventories + Work in progress + Other current assets + Cash and cash equivalents.
Short-term liabilities = Short-term debt + Dividends payable
◦ Operating cash flow ratio indicates how many times the short-term debt can be paid off with the cash flow from operating activities. The calculation is as follows:
Operating cash flow ratio = Cash flow from operating activities / Short-term liabilities
Short-term liabilities = Short-term debt + Dividends payable
2. Solvency of a company provides insight into the extent to which a company can meet its payment obligations in the long(er) term. This ratio also shows the extent to which a company is dependent on creditors. Solvency is actually the ratio between your equity and the capital you need.
◦ Total debt ratio = This ratio represents the ratio between Total Debt and Total Assets. The calculation is as follows:
Total debt ratio =(Assets -/- Equity)/Assets
◦ Debt-equity ratio = This ratio shows the ratio between Total Debt and Equity. You calculate this ratio as follows:
Debt equity ratio = Total Debt / Equity
Total Debt = Dividends payable + Long-term Debt + Short-term debt
◦ Equity multiplier = This ratio represents the ratio between Total Assets and Equity. The calculation is as follows:
Equity multiplier = Assets / Equity
◦ Long-term debt ratio = This ratio indicates the ratio between Long-term debt and Total assets. You calculate this ratio as follows:
Long- term debt ratio = Long-term debt / (Long-term debt + Equity)
◦ Interest coverage ratio = This ratio shows the ratio between EBIT and Financing Interest. The calculation is as follows:
Interest coverage ratio = EBIT/Interest
EBIT = Earnings before interest and taxes
3. Turnover shows the total amount of the sales.
◦ Asset turnover the ratio between the Net sales and the Assets. The calculation is as follows:
Asset turnover = Net sales / Assets
4. Profitability ratios show whether a company is financially healthy.
◦ Gross (Profit) Margin% = Here the Gross Profit (added value) is compared to the turnover. The calculation is as follows:
Gross Profit Margin = (Added value / Net sales) x 100%
Added value = Net sales -/- Cost of sales
◦ Operating Margin % = Here the EBIT is compared to the Net sales. The calculation is as follows:
Operating Margin = (EBIT / Net sales) x 100%
◦ Profit margin % = Provides insight into how well a company can convert net sales into profit. The net profit (Result after tax) is set off against the Net sales. The calculation is as follows:
Net Earnings margin = (Net Earnings / Net sales) x 100%
Net Earnings = Net sales -/- Cost of sales -/- Operating expenses -/- Interest -/- Corporate Income Tax.
◦ Return on Assets (ROA)% = ( Net Earnings / Assets ) x 100%
◦ Return on Equity (ROE) % = (Net Earnings / Equity) x 100%