Financial KPI Categories

Financial KPI Categories

7/10/2018

Key Performance Indicators

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Once an organisation has determined its value proposition, it may select KPIs that are aligned with its financial objectives. Financial KPIs allow managers to determine if their organisation is generating sufficient revenue and profits. [1]

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A study by Peavler (2017) explains how financial ratios may be classified under the following categories:

• Liquidity Ratios;
• Financial Leverage or Debt Ratios;
• Asset Efficiency Ratios;
• Profitability Ratios; and
• Market Value Ratios. [2]

Liquidity Ratios

1. Defining Liquidity or Solvency Ratios

Liquidity or solvency ratios estimate an organisation’s ability to fulfil its short-term debt obligations. They consider an organisation’s current assets and current liabilities, which may be found on its balance sheet. [3]
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The most common liquidity ratios are:
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• Current ratio: Measures an organisation’s ability to repay short-term and long-term obligations. The current ratio considers all of an organisation’s current liquid and illiquid assets, in relation to all of its current liabilities. [4]
  
  
• Quick ratio: Measures an organisation’s short-term liquidity, and its ability to meet its short-term obligations with its most liquid assets. This ratio does not account for inventories from the organisation’s current assets. [5]
  
  
• Burn rate (interval measure): Measures how long a business may continue its operations when its current expenses exceeds its current income. [6]

2. Examples of Liquidity Ratios

Days Sales Outstanding (DSO):

• Determines an organisation’s ability to collect payment after a sale has been made.
• Often determined on a monthly, quarterly or annual basis. [7]

Days Payable:

• Measures an organisation’s average payable period. This indicator determines how long it takes a company to pay its invoices from trade creditors (e.g. suppliers). [8]

Current Ratio:

• Measures an organisation’s ability to repay short-term and long-term obligations.
• The current ratio considers all of an organisation’s current liquid and illiquid assets, in relation to all of its current liabilities. [9]

Quick Ratio:

• Measures an organisation’s short-term liquidity, and its ability to meet its short-term obligations with its most liquid assets.
• This ratio does not account for inventories from the organisation’s current assets. [10]

Cash Turnover:

• Measures the frequency that an organisation spends its cash during a reporting period.
• Cash Turnover is calculated by dividing an organisation’s revenues over its average cash balance during a reporting period. [11]​

Financial Leverage or Debt Ratios

1.     Defining Leveraging Ratios

An organisation’s financial leverage or debt ratios measure an organisation’s ability to fulfil its long-term debt obligations. These indicators consider the organisation’s long term liabilities (e.g. bonds), measure the company’s overall financial health, and quantify its shareholder equity. [12]
 
2.     Examples of Leveraging Ratios

Shareholder Equity Ratio

• Measures how much shareholders would receive during a company-wide liquidation.
• Calculated by dividing an organisation’s total shareholders' equity its total assets.
• This ratio is expressed as a percentage. [13]

Debt Ratio

• A ratio that divides an organisation’s total debt by its total assets.
• Measures the proportion of a company’s assets that are funded by debt.
• Expressed as a decimal or percentage. [14]​

Asset Efficiency Ratios

1. Defining Asset Utilisation Ratios

Asset efficiency ratios determine how effectively an organisation uses its assets to sell its products and services. These indicators focus on the organisation’s sales and assets, which are respectively documented on its income statement and balance sheet.

The organisation’s asset efficiency ratios may determine the following:

• How well the organisation is run;
• The speed at which its products are sold;
• The average length of time that customers would pay for the organisation’s goods and services;
• How much capital is retained in the organisation’s inventory. [15]

 
2. Examples of Asset Utilisation Ratios

Return on Capital:

• Return of capital occurs when investors receive a portion of their original investment.
• These payments are not considered as taxable events, nor are they viewed as income or capital gains from an investment. They are not taxed as income. [16]

Current Asset Turnover:

• A ratio that measures how an organisation utilises its current assets (cash, inventory, accounts receivable, etc.) to generate sales.
• Ratio that divides the organisation’s net sales by its average current assets. [17]

Return on Assets:

• Determines an organisation’s profitability according to its total assets.
• Determines if an organisation’s managers are using its assets to generate value. [18]​

Profitability Ratios

1.     Defining Profitability Ratios

Profitability ratios consider an organisation’s ability to generate substantial returns on its assets and equity.
These indicators may address the following considerations:

• Whether or not an organisation’s assets are maximised;
• How effective an organisation’s operations are;
• How profitable an organisation’s activities are; and
• Whether the organisation is able to compete with similar companies. [19]

 
2. Examples of Profitability Ratios

Gross Margin

• Subtracts an organisation’s cost of goods sold (COGS) from its total sales revenue. This figure is divided by total sales revenue, and is expressed as a percentage.
• This indicator determines how much the organisation retains on each dollar of its sales. This monetary amount covers miscellaneous costs and obligations. [20]

Net Margin

• This indicator determines how much profit an organisation may generate from each dollar of its sales.
• This indicator is a ratio that compares the net profits of an organisation, business segment or product to its revenues. [21]

Sales Variance

• The monetary difference between an organisation’s actual and expected sales.
• This indicator is used to analyse changes in an organisation’s sales levels over a period of time. [22]​

Market Value Ratio

1. Defining Market Value Ratios
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Market value ratios relate to an organisation’s stock price. As such, they may only be calculated for publicly traded companies. [23] These ratios may be used to determine if an organisation’s shares are overvalued or undervalued. [24]
 
2. Examples of Market Value Ratios

Inventory to Asset

• Calculates the portion of assets that are retained in an organisation’s inventory. [25]

Inventory Turnover

• Calculates how many times an organisation has sold and replaced components in its inventory during a specific period of time. [26]

Rate of Return

• Calculates the gain or loss on an investment over a specified time period.
• This indicator is expressed as a percentage of an investment’s cost. [27]

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references

​[1] Karlson, K. (2016). 29 Popular Financial KPIs for your Financial KPI Dashboard. Retrieved from https://www.scoro.com/blog/financial-kpis-for-financial-kpi-dashboard/
[2] Peavler, R. (2017). What Are the Categories of Financial Ratios? Retrieved from Peavler, R. (2017). What Are the Categories of Financial Ratios? Retrieved from https://www.thebalancesmb.com/categories-of-financial-ratios-393217
[3] Peavler, R. (2017). What Are the Categories of Financial Ratios? Retrieved from Peavler, R. (2017). What Are the Categories of Financial Ratios? Retrieved from https://www.thebalancesmb.com/categories-of-financial-ratios-393217
[4] Investopedia. (n.d.). Current Ratio. Retrieved from https://www.investopedia.com/terms/c/currentratio.asp
[5] Investopedia. (n.d.). Quick Ratio. Retrieved from https://www.investopedia.com/terms/q/quickratio.asp
[6] Investopedia. (n.d.). Burn Rate Retrieved from https://www.investopedia.com/terms/b/burnrate.asp
[7] Investopedia. (n.d.). Days Sales Outstanding (DSO) Retrieved from https://www.investopedia.com/terms/d/dso.asp
[8] Investopedia. (n.d.). Days Payable Outstanding (DPO). Retrieved from https://www.investopedia.com/terms/d/dpo.asp
[9] Investopedia. (n.d.). Current Ratio. Retrieved from https://www.investopedia.com/terms/c/currentratio.asp
[10] Investopedia. (n.d.). Quick Ratio. Retrieved from https://www.investopedia.com/terms/q/quickratio.asp
[11] https://ycharts.com/glossary/terms/cash_turnover
[12] Peavler, R. (2017). What Are the Categories of Financial Ratios? Retrieved from https://www.thebalancesmb.com/categories-of-financial-ratios-393217
[13] Investopedia. (n.d.). Shareholder Equity. Retrieved from https://www.investopedia.com/terms/s/shareholderequityratio.asp
[14] Investopedia. (n.d.). Debt Ratio. Retrieved from https://www.investopedia.com/terms/d/debtratio.asp
[15] Peavler, R. (2017). What Are the Categories of Financial Ratios? Retrieved from https://www.thebalancesmb.com/categories-of-financial-ratios-393217
[16] Investopedia. (n.d.). Return of Capital Retrieved from https://www.investopedia.com/terms/r/returnofcapital.asp
[17] Finstanon. (n.d.). Current Asset Turnover. Retrieved from https://www.finstanon.com/ratios-dictionary/74-current-asset-turnover
[18] Investopedia. (n.d.). Return on Assets Retrieved from https://www.investopedia.com/terms/r/returnonassets.asp
[19] Peavler, R. (2017). What Are the Categories of Financial Ratios? Retrieved from https://www.thebalancesmb.com/categories-of-financial-ratios-393217
[20] Investopedia. (n.d.). Gross Margin. Retrieved from https://www.investopedia.com/terms/g/grossmargin.asp
[21] Investopedia. (n.d.). Net Margin. Retrieved from https://www.investopedia.com/terms/n/net_margin.asp
[22] Accounting Tools. (2018). Sales Variance. Retrieved from https://www.accountingtools.com/articles/what-is-a-sales-variance.html
[23] Peavler, R. (2017). What Are the Categories of Financial Ratios? Retrieved from https://www.thebalancesmb.com/categories-of-financial-ratios-393217
[24] Accounting Tools. (2017). Market Value Ratios. Retrieved from https://www.accountingtools.com/articles/market-value-ratios.html
[25] Inc. (n.d.). Financial Ratios. Retrieved from https://www.inc.com/encyclopedia/financial-ratios.html
[26] Investopedia. (n.d.). Inventory Turnover. Retrieved from https://www.investopedia.com/terms/i/inventoryturnover.asp
[27] Investopedia. (n.d.). Rate of Return. Retrieved from https://www.investopedia.com/terms/r/rateofreturn.asp