Financial measures

Performance

* Profit/Sales (%) - Percentage of sales left as profits or losses before tax, also known as the Profit Margin. Therefore a higher result, higher profitability. Reductions in this figure over time might indicate a need to re-evaluate sales pricing or supplier costs, or a need to reduce operating expenses.

* Profit/Capital Employed (%) - Indication of how much profit a business yields relative to the money invested, also referred to as Return on Capital. This is often used as a primary measure of company performance. This indicator shows simply whether an investor might be better keeping his money in a bank as its simple equivalent for an investment would be interest rate

* Profit/Total Assets (%) - Shows as a percentage the value of the pre-tax profits in proportion to the value of total assets. Very similar to the measure above except it ignores tax and borrowing rates. Useful to middle management of a company as they have no control over these issues.

* Profit/Shareholders Funds (%) - Proportion of pre-tax profit made in relation to the value of shareholders funds. Used to discriminate profits made ignoring any profit on borrowed funds.

Turnover

* Sales/Total Assets (%) - Shows as a percentage the value of sales in proportion to the value of total assets as a percentage. Also referred to as Asset Utilisation. Very different for different business types, compare a book shop with a fruit merchant for example.

* Sales/Fixed Assets - Shows as a ratio the value of sales in proportion to the value of fixed assets. Useful in some types of business where the fixed assets are large (Hotel chains, Department stores) or may have alternate uses.

* Working Capital/Sales (%) - Surplus or deficiency of funds from normal trading activities in relation to its size measured by sales. This measure is also very different for different type of company and the bookshop v fruit business example holds good.

* Stock Turnover - Turnover divided by stocks held - number of times stock is renewed each year.

* Credit Period (days) - Number of days, on average, for the company to collect trade debt. Calculated by dividing Trade Debtors by Sales and multiplying by 365 days.

* Creditor Days (days) - Number of days for company to pay trade creditors and therefore an indication of the amount of credit given to the business by its suppliers. The formula is trade creditors divided by sales multiplied by 365 days.

Cashflow

* Operating Cashflow/Operating Profit- Indicates how cash-generative the business is, without considering the need for investment in fixed assets. A good measure of profitability and the cost of growth, where ratios higher than 1 indicate high profitability and comparatively low cost of growth, and lower than 1 vice versa. Operating Cashflow is operating profit plus depreciation and amortization less net increase in working capital (increase in stocks plus increase in trade debtors less increase in trade creditors). This number is divided by operating profit.

* Cash flow/sales- Indicates the actual cash earnings of the business as a proportion of sales- the cash equivalent of the net profit margin. Cash flow is operating cash flow less taxes less fixed asset investment and other increases in net assets. The number is then divided by sales. Often only becomes positive when a business stops growing, and a high number is often a sign of a declining businees. Growing companies with positive cash flow as a percentage of sales are very attractive from a cashflow and investment perspective.

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