5 tools for analyzing your company’s financial performance

5 tools for analyzing your company’s financial performance


Published in :
Business strategies
Financial statements
Published on 18 February 2019
Reading: 3 minutes

5 tools for analyzing your company’s financial performance

The earnings statement, financial statement and shareholders’ equity are the three reports that provide an overall view of the state of a company at a given moment in time. But did you know there are other indicators for analyzing your financial performance and comparing it to those of your competitors? Here are the five main tools.


1) Liquidity ratios

Taken from balance sheet data, these indicators measure the ability of a company to pay its debts in the short term using its current assets. There are two types:

  • Current ratio: This ratio divides current assets by current liabilities. The higher the resulting number, the greater the likelihood your SME can meet its obligations for that period. If the result is much higher than your industry’s average, this might be a sign that the amount of cash on hand or accounts receivables are too high.
  • Cash ratio: To calculate this ratio, which is more restrictive than the current ratio, limit your total current assets to the value of marketable securities you have in hand. Then divide this result by current liabilities. A result greater than 1 is normal. Compare your result to that of a competitor for greater perspective.

2) Profitability ratios

These allow you to measure your profits and are of great interest to your shareholders or potential investors. These ratios are expressed as a percentage and include the following two indicators:

  • Gross profit ratio: Indicates the percentage of gross profit relative to revenue. To calculate the result, divide the first figure by the second. The result indicates what percentage of your sales are translated into profits.
  • Net profit ratio: Although very similar to the preceding, the only difference here is that net profit is divided by net sales. You can calculate net profit by subtracting all operating costs from gross profit for a given period. This indicator enables you to measure how much a company earns, after taxes, compared to its sales.

3) Leverage ratios

This ratio enables you to evaluate your SME’s solvency by indicating to what extent you make use of long-term borrowing to sustain your activities. It also enables you to evaluate your ability to meet your financing or interest charges.

  • Debt-equity ratio: This measures a company’s debt level by indicating the proportion of total assets financed by short-term and long-term debts. It’s easily calculated by dividing total liabilities by total assets. A low debt ratio is synonymous with better financial health. When the result is less than 1, this indicates that the majority of assets are financed by equity.


4) Operating ratios

These allow you to evaluate how efficiently companies use their resources and are definitely of interest to managers!

  • Average collection period: Divide the net amount of accounts receivable by daily net sales (total annual sales divided by 365 days). This will result in the average time needed to receive payment for services rendered. The higher the number, the more likely the situation might be affecting the company’s liquidity.
  • Inventory turnover rate: This indicates the number of times inventory is replaced in a year. Calculate it by dividing the cost of merchandise sold, a figure taken from your earnings statement, by average inventory during a given period. The higher the ratio, the more often inventory is renewed. Selling inventory quickly and frequently will really  make your earnings statement shine!

5) ROI, ROE and EVA: Indicators for calculating financial performance

  • ROI: Return on investment enables you to calculate the amount gained or lost relative to an amount initially invested. It is particularly useful in marketing and online business.
  • ROE: Return on equity measures the return on capital raised from shareholders. It’s a practical way of comparing the profitability of companies operating in the same sector.
  • EVA: Economic value added enables the measurement of value creation for shareholders in a given period.