Important financial indicators businesses need to know

Financial indicators play an important role in every business, helping administrators manage and control internal finances. In the article below, 1C Vietnam will provide information about 6 groups of financial indicators that businesses need to pay attention to. Refer now!

1. What do financial ratios mean in business operations?

Corporate financial index is used by administrators to compare the current time with the previous period, thereby getting the most overview of the corporate financial situation. In addition, these indicators are also used to compare with other businesses in the same industry, to evaluate the strengths and weaknesses of the business. If you know how to analyze financial indicators effectively, administrators can also easily predict the business situation of the enterprise in the near future.

2. Important financial indicators to pay attention to

In a report, there are many indicators used to show the current financial situation and future development potential of the business. Below are 6 groups of important financial indicators that businesses need to pay attention to:

2.1. Payment index group

• Current Ratio

Current liquidity ratio = Current assets/ Current liabilities

Current liquidity ratio is used to evaluate a business's ability to pay by converting assets into cash to pay short-term debts. This financial index is calculated by dividing existing assets by current liabilities. The higher the result, the stronger the financial situation of the business.

• Quick Ratio

Quick liquidity ratio = (Current assets – Inventory/Short-term debt)

The quick ratio is used to represent a business's short-term liquidity position, measuring a business's ability to meet its short-term needs with its most liquid assets.

• The ratio represents the ability to pay immediately

Current ratio = Current assets/ Current liabilities

This basic financial index is used to evaluate the current solvency of a business. The higher the solvency, the greater this index. And vice versa, if the result is smaller, the business may be about to go bankrupt.

• The ratio represents the ability to pay loan interest

Ratio expressing the ability to pay loan interest = Profit before tax and interest / Interest payable

This financial index is used to indicate a business's ability to pay interest, pay loan interests or creditor's risks,...

2.2. The index group represents the capital - asset structure

This group of financial indicators is calculated to check the balance in the capital-asset structure as well as the level of financial autonomy of the enterprise.

• The ratio reflects capital structure

Liability ratio = Liabilities / Total capital

Analyzing this financial index helps reflect the entire capital of the business paid with liabilities or the business's resources including debts.

Equity ratio = Owner's equity/ Total capital

This is an index that represents the percentage of equity in the total capital of the enterprise.

• The ratio reflects asset structure

Short-term asset investment ratio = Total short-term assets/ Total assets

Long-term asset investment ratio = Total long-term assets/ Total assets

These are two of the financial indicators that represent the proportion of short-term assets and long-term assets in the total assets of a business. In addition, this ratio also indicates the reasonableness of investment orientation, thereby proposing plans to change and readjust debts that are not consistent with business goals.

2.3. Group of indicators reflects the performance of a business

• ROS coefficient (Return On Sales)

ROS coefficient (Return On Sales) = Profit after tax / Net revenue

ROS coefficient is also known as sales profit margin, which indicates the level of efficiency in generating profits from sales activities of a business. This index is often calculated by analyzing the percentage of final revenue achieved by that business.

• BEP coefficient (Basic Earning Power)

BEP coefficient = Profit before interest and taxes (Earning before Interest and Taxes) / Average total assets (Total Asset)

BEP coefficient is one of the important financial indicators used to measure a business's ability to use assets to generate profits before interest and taxes. The BEP coefficient is also used to measure a business's earning capacity before taking into account income tax expenses and financial expenses.

• ROA coefficient (Return On Assets)

ROA coefficient = Profit after tax / Average total assets

ROA is one of the common financial indicators in financial reports. This is an index used to measure the level of profitability compared to the total assets of a business.

• ROE coefficient (Return On Equity)

ROE coefficient = Profit after tax / Average equity

This coefficient reflects the profitability from equity. This is also an index that investors pay special attention to before deciding to invest capital in a business.

• EPS Ratio (Earnings Per Share)

EPS ratio = (Profit after tax – Dividends for preferred shareholders)/ Number of shares issued

EPS are financial indicators that represent earnings per share, determined by dividing profits by the number of outstanding common shares of a business. This index informs the profitability of a business. Based on EPS, managers will know the profit generated from a common share after calculating taxes.

2.4. A group of indicators that effectively reflect the performance of a business

• Inventory turnover ratio

Inventory turnover ratio = Cost price/Inventory

By analyzing the above financial indicators , investors can grasp the level of working capital management of a business. Accordingly, the greater the turnover number, the higher the efficiency of inventory use and vice versa.

• Accounts receivable turnover ratio

Accounts receivable turnover ratio = Net credit sales / Average accounts receivable

The accounts receivable turnover ratio is a measure for accounting books, used to evaluate the completeness of collecting accounts receivable records and the amount of cash owed by customers of a business.

• Working capital turnover ratio

Working capital turnover ratio = Revenue/Average working capital

This ratio represents the working capital turnover rate of a business. If this ratio is too low, the business will not be able to recover cash, capital turnover will be slow,...

• Efficiency in using fixed capital of the enterprise

Efficiency in using fixed capital = Net revenue/ Average balance of fixed capital

Efficiency of fixed assets = Net revenue/ Average cost of fixed assets

These financial indicators show the efficiency of using fixed capital, helping administrators understand the level of fixed capital used by the business during a specified business period.

• Total capital turnover ratio

Total capital turnover ratio = Net revenue/ Average business capital

These financial ratios are also known as asset turnover, which shows how much revenue 1 dong of assets will bring to the business.

2.5. The group of financial indicators reflects profitability

A group of financial indicators that reflect profitability are used by investors to evaluate the level of profit distribution compared to the income a business generates for a shareholder.

• DPS coefficient (Dividends Per Share)

DPS coefficient = Profit after tax paid dividends for common shares / Number of common shares outstanding

DPS ratio (dividend per share) is the profit index published by an organization for each regular or extraordinary offer. These financial ratios are determined by separating a company's absolute profits, including breakeven profits for a year, from the number of typical offers made.

• Dividend Payout Ratio

Dividend payout ratio = Dividend per common share/ Earnings per common share

These financial ratios are the ratio between the total dividends paid to shareholders and the net income of the business. This is the percentage income paid to shareholders in the form of dividends.

• Dividend yield

Dividend yield = Dividend of a common share/ Market price of a common share

This corporate financial index is the rate of return that can be received from dividends if a stock is purchased at its current price.

2.6. Financial index group represents market price

• P/E ratio

P/E ratio = Market price of a common stock / Earnings of a common stock

The P/E ratio is the ratio of evaluating a business's current offering value compared to its earnings per share.

• P/B ratio

P/B ratio = Market value of a common share/ Book value of a common share

The P/B ratio is used to compare market capitalization with stock book value. This index is determined through dividing the stock price of each stock with the book value per share in the organization.

So, above is all the useful information about financial indicators that businesses can refer to. Hopefully through the above article of 1C Vietnam, businesses will better understand the 6 basic financial index groups in the market. If you have any questions, please contact us via hotline for more detailed advice and answers.