Understanding Key Performance Indicators
Key Performance Indicators (financial statement ratios)
The diverse array of data entered by the user allows for meaningful comparisons and benchmarking from both a valuation and operational performance perspective. Each individual piece of data plays a role in determining the magnitude of key valuation metrics ranging from the amount of profits and the profit margin to the relevant size, growth and risk- adjusted multiples. Using dozens of professional data sources (far more than what the typical business appraiser could access) which are continuously updated, the user is guaranteed a valuation report which is based on an unprecedented compilation of industry data.
The system gathers data entered by the user from financial statements or tax returns which are processed for both valuation and KPI purposes. The various KPI’s address the major financial areas of liquidity, solvency, activity and profitability with comparisons made to refined peer groups or industry cohorts of similar size. The subject firm’s KPI’s are then classified as below, near or above the industry norm, providing valuable insight into historical operations.
Certain KPIs such as the cash flow to revenues margin play a major role in directly affecting business value.
All KPI’s are calculated based on the analysis of company-specific data entered by the user and compared to various industry-specific averages reflecting the market dynamics of literally millions of other businesses. These KPI’s are useful measures of the overall financial and operational health and growth of the business and they should be checked regularly in order to identify meaningful trends or “red flags” which require corrective action. These same measures are commonly utilized not only by business appraisers, but also by business coaches, financial professionals and potential business acquirers in a variety of real world settings.
Each metric includes a classification which indicates whether the subject company is under- performing, near average or out-performing its peer group based on industry data obtained by BizEquity.
The valuation results will be more robust and accurate if data for all three periods is entered. Likewise, any interpretation of the financial and ratio analysis will be enhanced if data is provided for three full periods. Encourage the user to provide this data as a means of improving the quality of the valuation and evaluation results.
Much of the core financial statement analysis concerns breaking down the firm’s performance into measures which comprise the following categories:
Definition of 'Liquidity Ratios'
A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
Definition of 'Solvency Ratios'
One of many ratios used to measure a company's ability to meet long-term obligations. They provide a measurement of how likely a company will be to continue meeting its debt obligations.
Definition of 'Activity Ratios'
Accounting ratios that measure a firm's ability to convert different accounts within its balance sheets into cash or sales . Activity ratios are used to measure the relative efficiency of a firm based on its use of its assets, leverage or other such balance sheet items. These ratios are important in determining whether a company's management is doing a good enough job of generating revenues, cash, etc. from its resources.
Definition of 'Profitability Ratios'
A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expensesand other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.