Analysis of financial indicators: 5 Groups and 15 financial indicators business

In the context of economic volatility, the financial decisions based on accurate data, timely is a vital element of every business. Not only reflect the financial health current analysis of financial ratios also helps businesses evaluate the performance of operation, control risks, optimize development strategy.

This article Lac Viet Computing will help businesses understand the financial indicators, important analytical methods, and leveraging technology to optimize financial management.

The newspaper industry and related businesses:

• Report receivables – pay
• Report production costs
• Reported sales revenue

1. Introduction to analysis of financial indicators

1.1 financial indicators what is?

Financial ratios (Financial Ratios) is the rate is calculated from data in the financial statements of the business to evaluate operating performance, profitability, liquidity, financial leverage, cash flow. This is important tool that helps managers, investors, shareholders and stakeholders have a comprehensive view of the financial health of the business.

Indicators of financial analysis is built on three types of main financial statements:

• Balance sheet accounting – provides information about the assets, liabilities, equity.
• Report business results – reflect revenue, expenses, profitability of the business during an accounting period.
• Statements of cash flows – present cash flow in – out, help businesses assess the solvency and investment.

Financial indicators not only the tools to analyze the past, but also helps to forecast trends in the financial support strategic decisions, optimize effective business management.

1.2 the Role of the analysis of financial indicators in assessing the situation enterprise

Analysis of financial indicators play an important role in the measurement reviews the financial situation, performance, financial risks of the business.

The key benefits include:

• Evaluating financial health: Financial indicators help businesses know they are in a state of financial stability or are facing the risk of losing financial balance.
• Support strategic decisions: Based on index analysis, businesses can adjust trading strategies, investment or capital mobilization fit.
• To attract investors, partners: Investors, banks often use financial indicators to assess the level of safety and growth potential of the business before deciding to invest or provide credit.
• Help compare financial performance between businesses: Financial indicators help businesses collate operational efficiency with competitors in the same industry to find the optimal strategy.
• Detect financial risks: Business can rely on trends in financial indicators to identify problems in terms of liquidity, profitability, repayment capacity before they become a big risk.

For example, if only the amount of debt on equity (Debt-to-Equity Ratio – D/E) increases, this may signal that the business is based on borrowed capital more capital, increases the financial risks.

2. Why business need analysis, financial indicators?

Analysis of financial indicators not only help businesses understand the financial situation at present but also support the forecast financial trends, optimize management decisions. Here are the reasons businesses need to regularly analyze the financial indicators business.

2.1 Helps managers, investors, partners assess the financial performance

• Business managers use financial indicators to evaluate the performance, cost control, financial planning, long term.
• Investors consider the indicators of profitability, liquidity, financial leverage to decide whether to invest in business or not.
• Banks and credit institutions, analysis of solvency, cash flow, to grant borrowing limit, or adjust the interest rate consistent with the risk level of the business.

For example, if a business has net profit margin (Net Profit Margin) remained stable over 15%, operating cash flows, ocean, suggests the business is able to answer well, afford payment of financial obligations.

2.2 decision Support, strategy, risk control, optimization, profit

Businesses can use the index of financial analysis to adjust business strategy, financial to maximize profit and control risk.

• Adjusted financial model: If the debt ratio is too high, businesses can consider raising equity capital or restructure debt to reduce financial risk.
• Manage cost effective: If operating costs increase faster than revenues, business can find a way to optimize costs or improve performance.
• Optimize cash flow: If operating cash flows continuous, businesses need to plan to recover the debt, or search for capital replacement to ensure business operations are not interrupted.

3. The financial indicators, business critical

Businesses often use five groups of indicators in corporate finance important to assess the overall financial situation, make a decision strategy.

3.1 liquidity indicators – reviews solvency

Liquidity indicators is one of the most important indicators in analysis financial situation business help assess the likelihood of payment of the obligations short-term financing of the business. A business has just the good liquidity means that they have enough liquid assets to cover the debts, ensure business operations are not interrupted.

• The rate of current payments (Current Ratio): Determine the possibility of business payment of short-term obligations with short-term assets.
• Payment rate fast (Quick Ratio): evaluate the possibility of instant payments without the need to sell inventory.
• The proportion of cash payment (Cash Ratio): a Measure of the level of liquidity highest in cash, cash equivalents.

3.2 indicator of financial leverage – assess the level of debt of the business

Indicator of financial leverage measure the level of business use debt to finance business activity, from which the evaluation of financial risks that businesses are facing. Businesses have high leverage are usually able to expand its operations more robust, but also facing the financial risk is higher when the economy fluctuates.

• The ratio of debt to total assets (Debt Ratio): Reflects the level of use of debt to finance assets.
• The ratio of debt to equity (Debt-to-Equity Ratio – D/E): Assessment of the level depends on the borrowed funds than equity.
• The ability to pay interest on the loan (Interest Coverage Ratio): Determine ability to pay interest on the loan from operating profit.

3.3 index performance – Measurement effective use of assets

Metrics performance to help businesses assess the level of efficiency in using assets to generate revenue, including inventory management, debt collection, use the total assets. The index does not reflect only the productivity but also supports business optimization strategy, financial management, commissioning.

• Inventory turnover (Inventory Turnover Ratio): Rated speed rotation goods of the business.
• Spin receivables (Accounts Receivable Turnover Ratio): Determine the ability to recover debts of the business.
• Rotation total assets (Total Asset Turnover Ratio): Measure performance using assets to generate revenue.

3.4 profitability index – Assessment of profitability

Group index-profits to help businesses evaluate the effectiveness generate profits from business operations, the level of use of assets, capital to maximize profit. The analysis of financial indicators this group to help businesses identify financial situation actual measure profitability and propose strategies to improve financial performance.

• Gross profit margin (Gross Profit Margin): a Measure of effective cost management cost of goods sold.
• Bien net profit (Net Profit Margin): Reflects the net profit on total revenue.
• The rate of profit on total asset (ROA – Return on Assets): assess the profitability of the property business.
• Rates of return on equity (ROE – Return on Equity): Measure performance using equity.

3.5 money flow index – assess the ability to manage cash flow

Cash flow is the core element helps maintain business operations business stability guarantees, liquidity support financial decisions. Unlike profit – can be affected by the accounting policies, cash flow, denoting the actual amount that businesses can use. So, analyzing the money flow index to help businesses control good solvency, optimize cash flow, works to maintain sustainable development.

• Cash flow activity on short-term debt: Reflects the ability to pay from the line of actual money.
• Cash flow on total assets: assess the financial performance from the perspective of cash flow.

Analysis of these indicators help businesses have a clear view of the financial situation, from which to make decisions appropriate strategy for sustainable development.

4. Analysis of financial indicators group liquidity

Group liquidity indicators consists of three main indicators: the index of current payments (Current Ratio), only the quick ratio (Quick Ratio), only the number of cash payments (Cash Ratio).

4.1 indicators of current payments (Current Ratio)

Formula

{Index of the current payment} ={current Assets}/{short-term Debt}

In which:

• Short-term assets include cash, accounts receivable, inventory, other current assets can be converted into cash within one year.
• Short-term debt includes the debt due within a year, such as bank loans, short-term, pay suppliers, tax payable, accrued expenses.

Meaning and how to evaluate

• If Current Ratio > 1, the business has enough assets to pay short-term debt, i.e., good solvency.
• If Current Ratio
• Index of payments, current best practice is located in the range 1.5 – 2.5, depending on the industry and the level of volatility of short-term assets.

For example: A business has current assets is 500 billion and short-term debt is $ 300 billion, then:

Current Ratio ={500}/{300} = 1.67

This index shows business has good solvency for short-term debt.

4.2 Only quick ratio (Quick Ratio)

Formula

{Index fast payment} = ({current Assets} – {inventory})/{short-term Debt}

Or:

{Quick Ratio} ={Cash + Accounts receivable + short-term investments}/{short-term Debt}

Evaluate the possibility of instant payments

• Just some quick checkout help assess the ability to pay short-term debt that does not need to depend on inventory.
• If the Quick Ratio > 1, the business can pay short-term debt immediately without selling inventory.
• If the Quick Ratio

For example, If a business has current assets is 500 billion, inventory 200 billion, short-term debt 300 billion, then:

Quick Ratio ={500 – 200}/{300} = 1.0

This means that business has just enough ability to pay short-term debt if not inventory.

4.3. Only the number of cash payments (Cash Ratio)

Formula

{Index cash payment} = {Cash + cash equivalents}/{short-term Debt}

The impact of cash flow to solvency

• Only the number of cash payments reflect the ability to instant payment only in cash and cash equivalents.
• If the Cash Ratio > 1, businesses have the amount of cash sufficient to pay the entire short-term debt immediately.
• If the Cash Ratio

For example: If the business has cash and cash equivalents is 150 billion, short-term debt 300 billion, then:

Cash Ratio = {150}/{300} = 0.5

This means that businesses only have enough cash to pay 50% short-term debt immediately.

5. Index analysis financial group financial leverage

Only group of financial leverage includes only the amount of debt on total assets (Debt Ratio), only the amount of debt on equity (D/E Ratio), the index of ability to pay interest on the loan (Interest Coverage Ratio).

5.1 Only the amount of debt on total assets (Debt Ratio)

Formula

Debt Ratio ={Total debt}/{Total assets}

In which:

• Total debt includes short-term debt (pay suppliers, bank loans, short-term), long-term debt (bonds, long-term loans).
• Total assets include the entire current assets (cash, inventory, receivables), long-term assets (machinery, land, buildings).

Meaning and how to evaluate

• Debt Ratio > 0.5: Business use more debt to finance assets, synonymous with the level of financial risk is high.
• Debt Ratio
• Debt Ratio from 0.4 – 0.6 is generally considered ideal, depending on the industry business.

For example: A business has total debt of 300 billion and total assets is 600 billion, then:

Debt Ratio ={300}/{600} = 0.5

This suggests that business use 50% of the capital from debt and 50% equity, a ratio of relative balance.

The influence of the ratio of debt to financial risk

• Debt Ratio can lead to the burden of interest on large borrowers, reduce the net profit, the ability to expand business.
• Debt Ratio low to help businesses maintain financial stability, but may limit growth due to lack of capital investment.

5.2. Only the amount of debt on equity (Debt-to-Equity Ratio – D/E Ratio)

D/E Ratio = {Total debt}/{Equity}

In which:

• Equity includes capital contributed by shareholders, retained earnings of the business.
• Total debt includes short-term debt and long term debt.

Assess the level of use of debt to finance business activities

• D/E Ratio > 1: Business use loan debt more than equity → high financial Risk.
• D/E Ratio
• D/E Ratio ideal, usually from 1.0 – 2.5 depending on the industry.

For example, If a business has total debt is 400 billion equity is 500 billion, then:

D/E Ratio ={400}/{500} = 0.8

This suggests that business has the level of debt relative safety, never exceed the threshold of high risk.

The safety threshold of D/E according to industry, business

Industry	Threshold D/E safety
Industrial production	1.5 – 2.5
Banking, finance	6 – 10
Technology	0.5 – 1.5
Retail	1.0 – 2.0

5.3. Index of ability to pay interest on the loan (Interest Coverage Ratio – ICR)

Formula

Interest Coverage Ratio = EBIT/interest Expense

In which:

• EBIT (Earnings Before Interest and Taxes) is profit before interest and tax, reflecting the ability to generate profits from business operations.
• Interest expense is the total amount the company has to pay for the loan in states.

The ability to pay interest on the loan, the level of financial risk

• ICR > 3: Business ability to pay interest well, less risks of financial obligations.
• ICR from 1.5 – 3: Businesses can pay interest on the loan, but there is still a risk if the cash flow is affected.
• ICR

For example: If the business has EBIT is 150 billion and interest expense is $ 30 billion, then:

ICR=150/30=5

This means that business has profit before tax and interest on the loan is 5 times greater than the cost of interest on loan, shows ability to pay interest well.

Business should maintain this indicator at the level of how much to safety?

• ICR optimal, typically from 3 – 5, ensure the business has enough profit to pay interest on the loan, are native to reinvest.
• If ICR under 2, enterprises need to consider reducing the debt ratio or improve profits to avoid the risk of losing liquidity.

6. Analysis of financial indicators group performance

6.1. Index analysis inventory turnover (Inventory Turnover Ratio)

Formula

Inventory Turnover Ratio =cost of goods sold (COGS)/{inventory average}

In which:

• Cost of goods sold (COGS – Cost of Goods Sold): direct Cost to manufacture or purchase goods sold in the period.
• Inventory average: calculated by the formula:

Inventory average = (inventory, beginning of the period + inventory end of period)/2

The meaning of only the number of revolutions inventory

• High index (>5 times/year): Business has rotation speed express freight, inventory management good.
• Chỉ số thấp (<3 lần/năm): Doanh nghiệp có hàng tồn kho cao, có thể gặp vấn đề trong tiêu thụ sản phẩm hoặc bị tồn đọng vốn.
• Only the number of revolutions inventory ideals change, depending on the industry. For example:
  • The retail industry can reach 8-10 rounds/year due to the pace of sales is fast.
  • Industry machinery manufacturing are usually only reach 3-5 rounds/year of the production cycle longer.

For example: A business has cost of goods sold is 500 billion and inventory average is 100 billion, then:

Inventory Turnover Ratio=100/500=5

This means that business sold out of inventory average of yourself 5 times in a year.

6.2. Analysis only the number of revolutions accounts receivable (Accounts Receivable Turnover Ratio)

Formula

{Accounts Receivable Turnover} ={net Sales}/{Account receivable average}

In which:

• Net revenue: the revenue after deducting the discount, rebate, discount, returned goods.
• Account receivable average:

{Accounts receivable average} = (Accounts receivable beginning of the period +Accounts receivable period end)/2

Evaluate the possibility of recovery of the debt of the business

• High index (>7 times/year): Business has a policy on debt collection, effective, less prone to misappropriation of funds.
• Chỉ số thấp (<4 lần/năm): Doanh nghiệp gặp khó khăn trong thu hồi công nợ, có thể đối mặt với rủi ro nợ xấu.
• The index average of 5-7 times/year is reasonable for the majority of industry.

For example: A business has net revenue is 1,000 billion and accounts receivable average is 200 billion, then:

{Accounts Receivable Turnover} ={1.000}/{200} = 5

This means that the business recovery of receivables on average, 5 times in a year.

6.3. Analysis only the number of revolutions of total assets (Total Asset Turnover Ratio)

Formula

{Total Asset Turnover} = net Sales/Total assets average

In which:

• Net revenue: Total revenue minus the discount, rebate and refund.
• Total assets average:

{Total assets average} =(Total assets beginning of the period +Total assets end of period)/2

Reviews effective use of assets in generating revenue

• High index (>1.5 times/year): Business use assets efficiently to generate sales.
• Chỉ số thấp (<1 lần/năm): Doanh nghiệp có thể đang gặp vấn đề trong tối ưu hóa tài sản hoặc sử dụng tài sản không hiệu quả.
• Optimal threshold, typically from 1.2 – 2.0 times/year, depending on industry.

For example, If a business has net revenue is 2,000 billion and total assets average is 1,000 billion, then:

{Total Asset Turnover} ={2.000}/{1.000} =2

This suggests that businesses create 2 revenue from each 1 property, subject to the performance of good fortune.

Compare this indicator between businesses in the same industry

• Manufacturing enterprises have only the number of revolutions assets due to lower capital investment in fixed assets is large.
• Retail business or technology often have higher stats due to fewer fixed assets and revenue faster.

An example of just the number of rounds, total assets average by industry:

Industry	Average indicator
Retail	2.0 – 3.0
Technology	1.5 – 2.5
Industrial production	0.8 – 1.5

7. Analysis of financial indicators group profit

Four important indicator in this group include gross profit margin (Gross Profit Margin), margin net profit (Net Profit Margin), return on total assets (ROA) and return on equity (ROE).

7.1. Indicator gross profit margin (Gross Profit Margin)

Formula

{Gross Profit Margin} ={gross profit}/{net Sales}×100%

In which:

• Gross profit = net Sales – cost of goods sold (COGS).
• Net sales = Gross sales – deductions (discount, refund, discount).

The meaning of the indicator gross profit margin

• Index high (>40%): Business has pricing strategy, good management, cost-effective production.
• Chỉ số thấp (<20%): Doanh nghiệp có thể đang gặp vấn đề với chi phí nguyên vật liệu, lao động hoặc quản lý sản xuất.
• The average is usually between 25% – 50% depending on the industry.

For example: A business has net revenue is 1,000 billion and cost of goods sold is 600 billion, then:

{Gross Profit Margin} = (1.000 – 600)/1.000×100=40%

This means that for every $ 100 of revenue, business revenue about 40 gross profit.

The influence of cost of sales to gross profit margin

• Cost of sales increased high → gross profit margin decrease.
• Cost optimal production, raw materials are controlled → gross profit margin increase.

7.2. Index margin net profit (Net Profit Margin)

Formula

{Net Profit Margin} ={net profit}/{net Sales}×100%

In which:

• Net profit = net profit after tax (Net Income).
• Net sales = Gross sales – discounts.

Evaluate the ability to create real profit after deducting all costs

• Net Profit Margin > 15%: Business profitable good.
• Net Profit Margin from 5% – 15%: Business profitable on average.
• Net Profit Margin

For example: If the business has a net profit of 100 billion, and net revenue is 1,000 billion, then:

Net Profit Margin=100/1.000×100=10%

This means that for every $ 100 in revenue, the business earned 10 net profit.

7.3. Only the amount of profit on total asset (ROA – Return on Assets)

Formula

ROA={net profit}/{Total assets}×100%

Performance evaluation using assets to generate profits

• ROA > 10%: the Business using assets efficiently.
• ROA from 5% – 10%: average performance.
• ROA

For example: A business has net profit of 200 billion and total assets is 2,000 billion, then:

ROA=200/2.000×100=10%

Comparing ROA between the different professions

• The retail industry often have ROA is higher than the property is mainly inventory.
• The manufacturing industry has ROA lower due to fixed assets, big (machines, factories).

7.4. Index return on equity (ROE – Return on Equity)

Formula

ROE = {net profit}/{Equity}x100%

Index of ROE reflects the financial performance of the business like?

• ROE > 15%: Business generated good returns on equity.
• ROE between 10% – 15%: average, can improve.
• ROE

For example: If the business has net profit of 150 billion and equity of vnd 1,000 billion, then:

ROE=150/1.000×100=15%

8. Index analysis financial group cash flow

Two important indicators in this group include: money flow index operation on short-term debt, money flow index on total assets.

Analyzing the money flow index to help businesses:

• Control liquidity: Ensure there is enough cash to maintain operations, payment of financial obligations.
• Reviews effective use of assets: Determine the level of enterprise asset can be converted into cash.
• Forecast financial risks: identify the warning signs of financial difficulties before problems occur.
• Optimize investment decisions and financing: business Support determine when should invest more assets or restructuring cash flow.

8.1. Money flow index operation on short-term debt (Operating Cash Flow to Current Liabilities Ratio)

Formula

Money flow index operation on short-term debt = cash Flow from operations/current Liabilities

In which:

• Cash flow from operating activities (Operating Cash Flow – OCF) Is the cash flow to the fact that the business generates from business activities core, not including the investments or financial aid.
• Short-term debt Is the debt due within one year, including accounts payable, suppliers, interest on short-term loans, tax payable, accrued expenses.

Evaluate the possibility of payment from cash flow real

• Index > 1: Businesses have sufficient cash flow from operations to pay the whole debt short term → financial Situation safe.
• Index of from 0.5 – 1: operating cash Flows are not sufficient to pay off short-term debt, business can need support from other funding sources or optimize cash flow.
• Index

For example: A business has cash flow from business operations is 500 billion and short-term debt is 700 billion, then:

Money flow index operation on short-term debt = {500}/{700} = 0.71

This means that cash flow activities, just enough to pay 71% short-term debt, businesses need to plan to recoup the debt faster or cost optimization to improve solvency.

8.2. Money flow index on total assets (Operating Cash Flow to Total Assets Ratio)

Formula

{Index cash flow on total assets} ={cash Flow from business activities}/{Total assets}}

In which:

• Cash flows from operating activities: Measuring the amount of cash the actual business created from the core activities.
• Total assets: the Total value of the assets of the business, including short-term assets (cash, inventory, receivables) and long-term assets (machinery, factory, real estate).

How to evaluate performance from the perspective of cash flow

• Index of > 0.2 (20%): Business has the ability to generate strong cash flow, optimize the use of assets to generate cash.
• Index from 0.1 – 0.2 (10% – 20%): performance create cash in average, need to improve asset management.
• Index

For example, If a business has cash flow operation is 400 billion and total assets is 3,000 billion, then:

{Index cash flow on total assets} ={400}/{3.000} = 13.3\%

This means that for every $ 100 of assets, businesses create 13.3 copper cash flow from business activities, this is a pretty good level.

Compare the money flow index between the business

Index	Meaning	The optimal level
Cash flow activity on short-term debt	Reviews solvency short-term debt with cash flow real	>1.0
Cash flow on total assets	Measure the effectiveness generate cash from business property	10% – 20%

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Analysis of financial ratios not only is an accounting tasks but also a strategic tool to help businesses control the financial and business decisions efficiently. Understanding the indicators of liquidity, financial leverage, operating performance, profitability, cash flow help businesses predict trends, detect risk, capitalize on growth opportunities.