Performance metrics
To assess a company's efficiency, several ratios are used that measure how effectively the company utilizes its resources and manages its capital. Below are the key efficiency metrics and their interpretation guides.
Working capital
Working capital percentages describe how much and what kind of capital is tied up in a company's operations. Working capital measures the amount of capital tied up in a company's current business operations and indicates the need for operating financing.
Working Capital Interpretation Guide
Working capital's financing sources are short-term and long-term debt capital, as well as equity capital. Capital is tied up at various stages of a company's operations due to the delay in cash transfers relative to the output, for example, in inventory and accounts receivable. On the other hand, the company often receives payment terms for its accounts payable and gets the output for its use before the actual payment transaction. Working capital thus indicates the need for operating finance, generated by business operations, that needs to be covered by capital.
Formula
Working Capital %
The working capital percentage, on the other hand, indicates how much capital is tied up in the company's business operations relative to its scale.
Working capital % interpretation guide
Relating working capital to turnover enables inter-company comparison. However, the ratio should only be compared among companies in the same industry, as the need for working capital varies by industry.
Formula
Net Working Capital
Net working capital shows how much of a company's financial and current assets are financed by equity or long-term debt.
Net working capital interpretation guide
Net working capital indicates how much long-term capital is needed to finance current and financial assets. As business grows, the need for net working capital usually increases, so this ratio can be used to estimate future financing needs. The ratio can only be compared between companies in the same industry.
Formula
Net Working Capital-%
This ratio expresses net working capital as a proportion of revenue, which helps to assess the capital tied up in the business.
Net working capital-% interpretation guide
The net working capital percentage allows for comparison between companies, but it should only be used for companies in the same industry, as capital commitment varies by industry.
Formula
Inventory turnover period
The inventory turnover period indicates the average number of days that capital is tied up in inventory.
Interpretation guideline for inventory turnover period
The faster the inventory turns over, the more efficiently the company's material management and marketing are functioning. In this case, less capital is tied up in the company's inventory. Poor inventory turnover combined with the company's weak profitability and the general economic situation often indicates obsolescence in the inventory. The figure is industry-specific and has no general guide values.
Formula
Accounts Receivable Turnover Period
This ratio measures the average number of days that accounts receivable are outstanding before they are paid.
Accounts Receivable Turnover Period Interpretation Guide
The figure indicates the efficiency of the company's collections and, on the other hand, the payment terms granted to its customers. A balanced liquidity situation is considered to be when the turnover periods of accounts receivable and accounts payable are approximately equal. A long accounts receivable turnover period, combined with weak profitability and the general economic situation, often indicates non-current items in receivables.
Formula
Accounts payable turnover period
The accounts payable turnover period indicates how much the company has used supplier financing for its purchases. The value of the turnover period shows the average number of days it takes for the company to pay for its purchases.
Interpretation Guideline for Accounts Payable Turnover Period
The faster the inventory turns over, the more efficiently the company's material management and marketing are functioning. In this case, less capital is tied up in the company's inventory. Poor inventory turnover combined with the company's weak profitability and the general economic situation often indicates obsolescence in the inventory. The figure is industry-specific and has no general guide values.
Formula
Capital turnover
Capital turnover ratio indicates how many times a company circulates its entire capital in its business operations during a fiscal period. This ratio is particularly important in capital-intensive industries where large investments are necessary for business profitability.
Capital turnover rate interpretation guide
A company utilizes its capital efficiently and can generate high sales revenue in relation to the invested capital when the capital turnover is high. A low capital turnover, on the other hand, indicates that capital is tied up for long periods, which can weaken the company's ability to adapt to changes. When calculating the return on invested capital, the average amount of invested capital should be used as the denominator.