There are other financial metrics which are used to appraise or measure the performance of a manager as per the Financial Key Performance indicators; it is noteworthy to state that the stakeholders are kept abreast of the indicators which highlights the company’s performance.
Financial leverage: This is also known as the equity multiplier, which refers to the use of debt to buy assets. Where all the assets used are financed by equity, the multiplier is one. Hence, as debt increases, the multiplier increases from one, demonstrating the leverage impact of the debt and, ultimately, increasing the risk of the business.
Leverage = Total Assets / Total Equity
The debt-to-equity ratio is called a solvency ratio that measures how much a company finances itself using equity versus debt. It provides more insight into the solvency of the business by reflecting the ability of shareholder equity to cover all debt in the event of a business liquidation or shutdown.
Debt to Equity Ratio = Total Debt / Total Equity
Inventory turnover– It is called an efficiency ratio which measures how many times in an accounting period the company sold its entire inventory. This gives insight into whether a company has excessive inventory relative to its sales levels.
Inventory Turnover = Cost of Sales / (Beginning Inventory + Ending Inventory / 2)
Total asset turnover: This is an efficiency ratio that measures how efficiently a company uses its assets to generate revenue. The higher the turnover ratio, the better the performance of the company.
Total Asset Turnover = Revenue / (Beginning Total Assets + Ending Total Assets / 2)
Return on equity: It is more commonly known as ROE; it is a profitability ratio measured by dividing net profit over shareholders’ equity. It indicates how well the business can utilise equity investments to earn profit for investors.
ROE = Net Profit / (Beginning Equity + Ending Equity) / 2
Return on assets: This is also known as ROA, it is another profitability ratio, that is like ROE, which is measured by dividing net profit by the company’s average assets. It is an indicator of how well the company is managing its available resources and assets to net profits.
ROA = Net Profit / (Beginning Total Assets + Ending Total Assets) / 2
Operating cash flow: It is a measure of how much cash the business has because of its operations. The measure could be positive, which may mean more cash is available to grow operations, or negative, and may mean additional financing would be required to maintain current operations. The operating cash flow is usually found on the cash flow statement and the direct or indirect method may be used to calculate it.
Seasonality analysis or ratio: It is a measure of how season of the year is affecting the company’s financial numbers and outcomes. In an industry that is caught up or affected by the high and low seasons, it is a good measure which will help to sort out those variables and to see the numbers for what they truly are. It is clearly visible to be seen on how the season is affecting it.
From all these indicators it is important to note that is no absolute good or bad when it comes to financial KPIs. The metrics will need to be compared to prior years or with competitors in the industry to see whether the company’s financial performance is improving or declining and how it is performing relative to others.
The above are just a few but there are many other financial KPIs that can track and monitor or to understand how a company is doing and how the action of the manager is impacting the progress of its shared goals.
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