Cash Conversion Cycle (CCC): This measures the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales. A shorter CCC is generally better as it indicates more efficient use of working capital.
Current Ratio: This measures a company’s ability to pay off its current liabilities with its current assets. A higher ratio generally indicates better liquidity and lower risk of default.
Days Sales Outstanding (DSO): This measures the average number of days it takes for a company to collect payment after a sale has been made. A lower DSO is generally preferred as it indicates faster collection of accounts receivable.
Debt-to-Equity Ratio: This measures the degree to which a company is financing its operations through debt versus equity. A lower ratio is generally preferred as it indicates lower financial risk.
Free Cash Flow: This is the cash a company generates from operations minus capital expenditures. It shows how much cash a company has available for dividends, debt repayment, or other investments.
Gross Margin Dollars – Gross Margin Dollars represent the total revenue from sales minus the cost of goods sold (COGS). It reflects the amount of money a company has left after covering the direct costs associated with producing or delivering goods. Gross Margin Dollars = Revenue – Cost of Goods Sold (COGS). The higher the gross margin the better.
Gross Margin Percentage – The ratio of gross margin dollars to total revenue, expressed as a percentage. Grodd Margin Percentage gives insight into the profitability of a company. Gross Margin Percentage = (Gross Margin Dollars / Revenue) * 100. Manufacturing companies, for example, might want to aim for a gross margin percentage above 20%.
Net Profit – Also known as net income or net earnings, is the total amount of money a company will have left after deducting all expenses, (COGS – Cost of Goods Sold, operating expenses, taxes, and interest) from its revenue. Net Profit = Revenue – Total Expenses. Factors like efficiency, cost control, and market conditions will affect net profit. For the manufacturing vertical, a net profit margin of 5-10% is considered good.
Operating Cash Flow: This measures the amount of cash generated from a company’s principal revenue-producing activities. Positive and growing operating cash flow is a good sign of financial health.
Return on Assets (ROA) and Return on Equity (ROE): These measure how efficiently a company is utilizing its assets and shareholders’ equity to generate profits.
Return on Average Capital Employed (ROACE) – ROACE measures a company’s ability to generate profits from its capital employed. Both equity and debt are considered, and demonstrate how efficiently a company is using its capital to generate returns. To calculate ROACE, use this formula: (Net Profit / Average Capital Employed) * 100. An ROACE metric of 10-20% is often considered a decent return in the manufacturing industry.
