Custom KPIs

This article outlines four key categories of financial KPIs—Profitability, Liquidity, Leverage, and Efficiency. These KPIs help businesses assess financial performance, manage cash flow, optimize operations, and make informed strategic decisions.

Custom (KPIs) for Financial Analysis

1. Profitability KPIs

2. Liquidity KPIs

3. Leverage KPIs

4. Efficiency KPIs

1. Profitability KPIs

Profitability KPIs measure a company’s ability to generate profit relative to its revenue, operating costs, and capital structure.

EBIT (Earnings Before Interest and Taxes)

• Definition: EBIT represents a company's operating profit before deducting interest and taxes. It indicates a company's profitability from core operations.

  • Formula: EBIT = Revenue – Net Income + Interest + Taxes
  • Use: Helps assess a company's operational efficiency and profitability before financial obligations.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

• Formula: EBITDA = EBIT + Depreciation + Amortization
• Use: Often used by investors and analysts to compare companies without the impact of financing and accounting decisions.

2. Liquidity KPIs

Liquidity KPIs assess a company’s ability to meet short-term financial obligations.

Quick Ratio

Definition: The Quick Ratio measures a company’s ability to pay off short-term liabilities using its most liquid assets (cash, marketable securities, and receivables).

• Formula: Quick Ratio = (Current Assets – Inventory) / Current Liabilities
• Use: A higher ratio indicates strong liquidity, while a lower ratio may signal cash flow issues.

Working Capital

Definition: Working Capital represents the difference between a company’s current assets and current liabilities. It reflects short-term financial health and operational efficiency.

• Formula: Working Capital = Current Assets – Current Liabilities
• Use: Positive working capital indicates financial stability, while negative working capital may suggest liquidity problems.

Free Cash Flow (FCF)

Definition: Free Cash Flow is the cash remaining after a company covers operating expenses and capital expenditures. It reflects the company's ability to generate surplus cash for growth or shareholder returns.

• Formula: FCF = Operating Cash Flow – Capital Expenditures
• Use: Investors and analysts use FCF to assess a company’s financial flexibility and investment potential.
  
  

3. Leverage KPIs

Leverage KPIs evaluate a company’s financial structure and debt management.

Return on Equity (ROE)

Definition: ROE measures how effectively a company generates profits from shareholders’ equity. It reflects financial efficiency.

• Formula: ROE = Net Income / Shareholders’ Equity
• Use: Higher ROE indicates better utilization of investor funds, but excessively high ROE may indicate financial risk.

Debt to Equity Ratio

Definition: This ratio compares a company’s total debt to shareholders’ equity, indicating how much of the company is financed through debt versus equity.

• Formula: Debt to Equity Ratio = Total Debt / Shareholders’ Equity
• Use: A higher ratio suggests higher financial risk, while a lower ratio indicates more conservative financing.

Debt Service Coverage Ratio (DSCR)

Definition: DSCR measures a company’s ability to service its debt obligations with its operating income.

• Formula: DSCR = Net Operating Income / Total Debt Service
• Use: A DSCR greater than 1 indicates that a company generates enough income to cover its debt payments.

4. Efficiency KPIs

Efficiency KPIs measure how well a company manages its assets and operations.

Accounts Receivable (A/R) Turnover

Definition: A/R Turnover measures how efficiently a company collects payments from customers.

• Formula: A/R Turnover = Net Credit Sales / Average Accounts Receivable
• Use: A higher turnover rate suggests effective credit and collections management.

Days Inventory Outstanding (DIO)

Definition: DIO calculates the average number of days a company takes to sell its inventory.

• Formula: DIO = (Average Inventory / Cost of Goods Sold) × 365
• Use: Lower DIO indicates efficient inventory management, while higher DIO may signal excess inventory.

Days Sales Outstanding (DSO)

Definition: DSO measures the average number of days it takes for a company to collect payments from customers.

• Formula: DSO = (Accounts Receivable / Total Credit Sales) × 365
• Use: A lower DSO means faster cash collection, while a higher DSO may indicate collection issues.

Days Payable Outstanding (DPO)

• Definition: DPO shows the average number of days a company takes to pay its suppliers.

  • Formula: DPO = (Accounts Payable / Cost of Goods Sold) × 365
  • Use: A higher DPO may improve cash flow but can hurt other KPIs such as Current Ratio.

Cash Conversion Cycle (CCC)

Definition: CCC measures the time it takes for a company to convert inventory purchases into cash flow from sales.

• Formula: CCC = DIO + DSO – DPO
• Use: A shorter CCC means faster cash flow cycles, which is beneficial for financial health.

Fixed Asset Turnover Ratio

Definition: This ratio evaluates how efficiently a company uses its fixed assets to generate revenue.

• Formula: Fixed Asset Turnover = Net Sales / Average Fixed Assets
• Use: Higher ratios indicate better asset utilization, while lower ratios may suggest inefficiency.

Labor Cost Percentage

Definition: Labor Cost % measures labor expenses as a proportion of total revenue.

• Formula: Labor Cost % = (Total Labor Costs / Total Revenue) 
• Use: Helps businesses assess labor efficiency and control costs.