Posts Tagged ‘financial ratios’

Importance of Free Cash Flow

In some previous posting I discussed how important it was to convert profits to cash. See Cash Flow – The Bottom Line for more on this. Now let’s look at cash from a different perspective.

Free Cash Flow Defined

Generally free cash flow is considered to be operating cash flow minus capital expenditures. This recognizes that capital spending for things like equipment is necessary if a company is to remain competitive. These capital expenditures help a company become more efficient or even allow them to Read the rest of this entry »


Importance of Net Profit and Net Margin

Net profit and net margin are two of the most important business metrics. It is essential that they be clearly understood and interpreted.

Net Profit & Net Margin Defined

Net Profit is the bottom line after deducting all expenses of the company. The formula to calculate net profit is:

Net Profit = Sales–(COGS + Operating Expenses + Other Income & Expenses + Taxes)

In the formula above COGS is the abbreviation for for Cost of Goods Sold. For clarification, revenue is sometimes used instead of the term sales, and in the formula above other income & expenses includes Read the rest of this entry »


Productivity of Fixed Assets

I remember a client a few years ago who tended to make what he considered bargain purchases of equipment. Often the purchases were large enough that they needed to be capitalized. Unfortunately much of what he bought turned out to be useless and ended up sitting around the building like an over-grown paperweight. He may have still thought these purchases were a good idea, but they certainly weren’t producing a decent return. In fact, they were producing no return whatsoever and were nothing more than a waste of financial resources. So, what should you expect out of your fixed assets? Read the rest of this entry »


Two Measures of Financial Return

Recently I’ve been focusing on financial ratios and how they can help you measure performance. You’ve probably heard the old advice on a personal level, “If you’re not using something, maybe you need to get rid of it.” Another way to look at this is whether the benefits you derive outweigh the cost of ownership or produce a positive result. An example would be Read the rest of this entry »


Two Sales Measurements

Sales, sales, sales! We need more sales is the common cry. But stop and ask if you are getting those sales efficiently. Here are a couple of financial measurements.

Advertising Results

There are numerous measures of advertising results, but here I want to focus on advertising to sales. Advertising to sales in calculated as:

Advertising to Sales = Advertising Expense / Sales

This is expressed as a percentage. Sounds simple enough, doesn’t it? But what is this telling you? Basically this is Read the rest of this entry »


Debt Coverage

In the posting Why Debt Ratios Matter we looked briefly at what debt really is, one way of measuring it, and how the mix of debt and equity played a role in how appropriately a business was financed. Now let’s look at servicing debt, also known as debt coverage.

What Determines Debt Coverage?

Think about this from a personal perspective. Imagine you took out a loan to buy some furniture for your home, and it was one of those loans where you only paid interest for the first year. Starting in the second year you would be required to start Read the rest of this entry »


Why Debt Ratios Matter

If you don’t have a handle on your company’s debt you may find yourself without a company. Here are a few things to consider.

Types of Debt

There are two sources of capitalization for a company. One is owner equity and the other is debt. First let’s consider debt.

Debt may be in a number of forms, with bank loans to bonds being among them. An asset-based loan could be from a bank or other financing organization and Read the rest of this entry »


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