The Most Important Performance Indicators for Business are known as Key Performance Indicators (KPI).
On the following page is the most important metrics to use for your business.
While some are industry-specific there are several that are used across the board.
Why We Use Key Performance Indicators
In Corporate Finance, some call it Ratio Analysis. Ratio Analysis compares two companies that are different in size and management style. Using KPI Metrics is a great way to measure how efficient a company is in its operations and profits. Solvency, or Debt, can be used to analyze how well a company can pay its financial obligations.
KPI Ratios can be broken down into five categories
Profitability Ratios measure the company’s ability to generate income.
Return Ratios demonstrate the company’s ability to generate returns for the shareholders. We’ll typically look at a Return Metric against a Balance Sheet Item
- Return on Equity
- Return on Assets
- Return on Capital Employed
Margin Ratios is a company’s ability to turn sales into profits with different metrics. Margin Ratios usually look at certain returns when compared to Revenue Items.
- Gross Margin Ratio
- Operating Profit Margin
- Net Profit Margin
A Leverage Ratio is any ratio that indicates the level of debt incurred by a business against accounts in the Balance Sheet, Income Statement, or Cash Flow Statement. These metrics provide guidance on how the company’s assets and business operations are financed.
- Debt to Equity
- Equity Ratio
- Debt Ratio
Efficiency measures how well a company uses its assets and resources. These ratios determine how many times a business can accomplish a metric within a period of time or how long it takes to complete.
- Accounts Receivable Turnover
- Accounts Receivable Days
- Asset Turnover
- Inventory Turnover
- Inventory Turnover Days
Liquidity Ratios determine the financial stability of a company. These metrics measure a company’s ability to repay Short Term and Long Term Liabilities and can be used to measure risk.
- Current Ratio
- Quick Ratio
- Cash Ratio
- Defensive Interval Ratio
- Times Interest Earned Ratio
- Times Interest Earned (Cash Basis) Ratio
- CAPEX to Operating Cash Ratio
- Operating Cash Flow Ratio
Multiple Valuation Ratios
Multiple Valuation Ratios are used to determine the value of a company. These ratios help determine the share price of a company going public, a target price for equity research, or if a company is under or overvalued relative to others in the same industry.
- Price to Earnings (P/E) Ratio
- EV/EBITDA Ratio
- EV/EBIT Ratio
- EV/Revenue Ratio
Each of these valuation Ratios has its there pros and cons, so some will be more suitable for certain businesses depending on their structure.
Final Thoughts on Key Performance Indicators
You won’t use all of these. Some will have more value to you than others, but this a guide is a reference to help determine which of these may be of use to your business.