Health cash flow provides opportunities to invest in the company. Buy stock, pay off debt, etc.
Calculation: Cash from Operating activities – Capital expenses
In most industries, a current ratio is too low when it is getting close to 1. This means they can barely cover the liabilities that will come due with the cash they have coming in. Most bankers won’t loan money to a company with a current ratio near 1. Less than 1, is way too low, regardless of how much cash they have in the bank. If less than 1 they will likely run out of cash by the end of the year. A current ratio too high means they are sitting on cash rather than investing it or returning it to the shareholders.
Calculation: Current assets / Current Liabilities
When this number is too close to 1 it indicates, they can’t make their interest payments. The higher the number the more debt they are able to take on.
Calculation: Operating profit/Annual interest paid
DSO is the average number of days that a company takes to collect revenue after a sale has been made. A low DSO means that it takes fewer days to collect your accounts receivable. A high DSO means that a company is selling its product on credit and taking longer to collect payments.
Calculation: Accounts receivable ÷ Total Credit Sales * Number of Days
Used to assess a company’s profitability by comparing revenue with earnings. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization.
Calculation: EBITDA ÷ Revenue
This ratio is used as a relative measure of debt. In other words, what you owe in relation to what you own. The two components in the calculation–i.e., total liabilities and total equity–come from the Balance Sheet.
Calculation: Total Liabilities ÷ Total Equity
Once again, this metric is one of the most affected when calculating value delivered. If your value increases revenue or reduces labor cost, it will positively affect it.
Calculation: Total Sales ÷ Total Payroll Expense
This simple calculation is important because our research indicates that the majority of value delivered by organizations is a reduction in labor cost. The average U.S. Corporation keeps this figure around 20 percent – 23 percent depending upon the market they serve.
Calculation: Total Payroll Expense ÷ Total Revenue
Net profit margin is the bottom line – the amount you have left after every other expense is taken out. Gross profit margin is your revenue minus what it costs to make your product.
Calculations: Net Profit margin = Net pretax profit ÷ Revenue, and Gross profit = Gross profit ÷ Revenue
Operating costs are the day to day expenses incurred in running a business. For example, cost of sale or administrative costs are considered operating costs. Production costs are not considered operating costs.
Earnings is revenues minus cost of sales, operating expenses, and taxes over a given period of time.
Calculation: Earnings = Revenue – (Operating expense + taxes)
Sometimes called, “Return on net worth”, ROE measures a corporation’s profitability by revealing how much profit it generates with the money shareholders have invested. Displayed as a percentage, ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
Calculation: ROE = Net Income ÷ Shareholders Equity
ROA is an indicator of how profitable a company is relative to its total assets. The assets of a company are comprised of both debt and equity. The ROA percentage gives investors an idea of how effectively the company is converting the money it has to invest into net income. It is most effective to compare current ROA to previous year ROA. The higher the ROA percentage, the better, because the company is earning more money on less investment. For example, if one company has a net income of $10 million and total assets of $50 million, its ROA is 20 percent ($50M / $10M); however, if another company earns the same amount but has total assets of $100 million, it has an ROA of 10 percent. Based on this example, the first company is better at converting its investment into profit.
Calculation: ROA = Net Income ÷ Total Assets