13 Key Financial KPIs For Boosted Financial Performance

By Nicholas Barone

Published: 25 April 2022

Key performance indicators, or KPIs, are financial data metrics used to manage and help your business, assess its financial health, its potential for growth, and detect any issues before they become a problem for your business.

But what are these indicators or financial ratios, and how do you calculate them?

We came up with a list of finance thirteen KPIs that you and your business should really monitor.

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Performance Indicator-Definition

Performance indicators are found on either:

the balance sheet, or
the income statement

Studying the entirety of indicators allows you to get a pretty comprehensive overlook of the financial situation of your business at a specific time, and to evaluate:

your financial balance
your profitability
your financial independence

Financial performance indicators are therefore important:

to optimize the way you use financial resources
to anticipate and get ahead of potential financial risks
to plan potential investments, or conversely future necessary budgeting

Types of KPIs

While there might be a ton of KPIs out there, the majority of them tend to fall under five main categories:

Leverage KPIs – like the return on equity or debt to equity ratio
Valuation KPIs – like earnings per share or the quick ratio
Efficiency KPIs – like accounts receivable or inventory turnover
Liquidity KPIs – like the current or quick ratio
Profitability KPIs – like gross profit or net profit margin

KPIs With Formulas and Examples

There are countless KPIs out there, but here’s thirteen to look out for:

1. Working Capital Requirement (WCR)

Working capital requirement is a necessary indicator for businesses to:

compensate for possible short-term cash flow problems
be able to spend while awaiting collection of funds

WCR Formula = (average inventory + trade receivables) – payables

2. Net Working Capital (NWC)

Net working capital is the safety cash reserve to meet working capital requirements.

This is the excess money after funding of:

employees, or fixed assets
investments through stable resources, or permanent capital and long-term financial debt

NWC Formula = stable resources – long-term employees

3. Net Cash

Net cash is the money your business has that can be used immediately, i.e., cash on hand. This also reflects a short-term financial balance.

Therefore, net cash is the difference between what you have on hand and your debt. But, if you want to be a bit more technical, we can use two previous indicators to calculate net cash:

Net cash= NWC-WCR

4. Breakeven Point

The breakeven point is the amount a business has to earn in order to cover all of its costs, including fixed and variable, and start turning a profit.

It gives an idea of how viable the business is, even before starting.

Breakeven point formula = Fixed costs/((Revenue – variable costs)/Revenue)

5. Sales Margin

Sales margin is the profit generated by businesses, meaning the difference between the sales price and the price of goods and services.

It allows businesses to estimate future revenue streams, but also to change their sales strategy, notably in terms of prices.

Sales margin formula = Revenue (excluding tax) – Costs (excluding tax)

6. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

EBITDA corresponds to:

income generated by the main activities of the business
after social deductions
before depreciation

EBITDA, as the name indicates, is therefore the financial result of the business, before interest, taxes, depreciation, and amortization.

EBITDA = Net Income + Taxes + Interest Expenses + Depreciation

It can also be used to calculate:

Return on capital = EBITDA/Capital invested
Cost control/efficiency = EBITDA/Revenue

7. Financing Capacity

Financing capacity is the surplus generated by the business, that can later be used.

It’s the result of net cash and “non-cash” expenses, such as:

Depreciation
Provisions for risks and charges

Formula: EBITDA + cashable items – cashable expenses

8. Interim Management Balances

Interim management balances represent several financial indicators, allowing you to understand your business’s financial results.

Among those include:

Sales margin
EBITDA

But also some we didn’t cover:

Operating result
Financial result
Net result before taxes
The exceptional result
Net result

9. Quick Ratio

The quick ratio is a performance indicator of a company’s immediate liquidity position, and also whether a company can meet their short-term obligations. It specifically measures near-cash assets, the ones that can be converted into cash quickly, and whether a company can pay off its liabilities without having to sell its assets.

The higher the ratio, the better the financial position of a company is, the lower, the worse and harder it will be for a company to meet its financial obligations.

Formula: QR = CE + MS + AR/CL

Where:

QR = Quick Ratio

CE = Cash & Equivalents

MS = Marketable Securities

AR = Accounts receivable

CL = Current liabilities

Note-Quick ratio is also called the “acid test ratio”.

10. Debt-to-Equity Ratio

The debt-to-equity ratio compares the number of liabilities, or debt, to the amount of shareholder equity. It’s specifically used to measure a company’s financial leverage or the amount of debt used to intensify returns from a project or investment. In short, it shows how much a company is funding its daily operations using debt, compared to traditional funds owned by the company.

Debt-to-equity can be used by investors to gauge whether investing in a company would be risky or not. However, different industries have different standards of debt levels, meaning that comparing different companies from different industries may be misleading or unreliable.

The formula for the debt-to-equity ratio is pretty self-explanatory, it is:

Total Liabilities/Total Shareholders’ Equity

Note: This ratio can also be expressed as a percentage.

11. Return on Equity (ROE)

ROE, or return on equity, is an indicator used to measure a company’s profitability. The formula is pretty straightforward, it’s:

Net income/Shareholders’ equity

Like the previous indicator, debt-to-equity, investors use this as a way of measuring a potential investment. However, in this case, this is used to measure how much return a shareholder gets with a specific stock.

12. Inventory Turnover

Inventory turnover measures the number of times a company sells and replaces its inventory during a given period. Generally speaking, most companies want to have a high inventory turnover, this means that they’re selling and replacing their inventory fairly quickly, rather than the opposite which means weak sales.

Inventory turnover’s formula is the following:

Net sales/Average inventory at selling price

13. Current Accounts Receivable (AR) Ratio

Current accounts receivable is used to calculate the portion of the company’s customers that pay on time. It’s calculated by subtracting past due accounts receivables from the total amount of accounts receivables, then dividing that by the total amount of account receivables. A higher ratio usually indicates fewer past due invoices, and a lower ratio usually means the company in question is having a hard time getting its customers to pay.

(Total Accounts Receivables – Past due accounts receivables)/ Total Accounts Receivables

Industry-Specific KPIs

While most of the indicators we just listed are applicable to the majority of businesses, some of them, like inventory turnover, for example, are specific to companies that deal with manufacturing.