The Top 10 Financial Performance Indicators You Should Know

Represents the percentage of revenue left after subtracting the cost of goods sold (COGS). This metric focuses on the core profitability of a company’s products or services before accounting for other operational expenses, helping assess pricing strategies and production efficiency.

Example: A company’s revenue is $300,000, and the cost of goods sold (COGS) is $180,000. The gross profit margin is ((($300,000 - $180,000) / $300,000) × 100) = 40%.

Measures how effectively a company uses its assets to generate profit. It’s calculated by dividing net income by total assets. A higher ROA indicates more efficient use of assets in generating earnings.

Example: A company has a net income of $50,000 and total assets of $500,000. The ROA would be ($50,000 / $500,000) × 100 = 10%.

Assesses the return on shareholders' equity, reflecting how well a company generates profit from its shareholders’ investments. It’s calculated by dividing net income by shareholder equity. A higher ROE suggests effective management and strong financial performance.

Example: A company has a net income of $75,000 and shareholder equity of $300,000. The ROE would be ($75,000 / $300,000) × 100 = 25%.

Evaluates a company’s ability to meet short-term obligations with its short-term assets. Calculated by dividing current assets by current liabilities, this ratio helps gauge liquidity and short-term financial health.

Example: A company has $200,000 in current assets and $150,000 in current liabilities. The current ratio would be $200,000 / $150,000 = 1.33.

A more stringent measure of liquidity than the current ratio, it excludes inventory from current assets. Calculated by dividing (current assets - inventory) by current liabilities, it provides insight into a company’s ability to meet short-term obligations without relying on inventory sales.

Example: A company has $200,000 in current assets, $50,000 in inventory, and $150,000 in current liabilities. The quick ratio would be ($200,000 - $50,000) / $150,000 = 1.00.

Indicates the proportion of a company’s funding that comes from debt compared to equity. Calculated by dividing total liabilities by shareholder equity, this ratio reveals financial leverage and risk. A higher ratio suggests greater reliance on debt.

Example: A company has $400,000 in total liabilities and $200,000 in shareholder equity. The debt-to-equity ratio would be $400,000 / $200,000 = 2.0, indicating the company uses twice as much debt as equity.

Provides a snapshot of a company’s operational profitability by excluding interest, taxes, depreciation, and amortization. It helps assess core business performance and compare profitability across companies.

Example: A company has $120,000 in revenue, $40,000 in operating expenses (excluding interest, taxes, depreciation, and amortization). EBITDA would be $120,000 - $40,000 = $80,000.

Measures the cash generated or used by a company’s core operational activities. This indicator reflects the company’s ability to generate sufficient cash to sustain and grow its business operations without relying on external financing.

Example: A company reports $30,000 in net income, but adjusts for $5,000 in depreciation and $3,000 in changes in working capital. The cash flow from operating activities is $30,000 + $5,000 + $3,000 = $38,000.