Liquidity
| Cash Ratio |
The strictest liquidity test: the share of current liabilities that could be paid today from cash and marketable investments alone. |
| Current Ratio |
Whether the assets that turn into cash within a year cover the obligations due within a year. |
| Net Working Capital |
The amount by which current assets exceed current liabilities: the cushion that funds day-to-day operations. It is the current ratio expressed in money instead of as a ratio. |
| Quick Ratio |
Whether short-term obligations are covered without selling inventory: only cash, marketable investments and receivables count. Also called the acid-test ratio. |
| Trade Working Capital |
The capital tied up in the operating cycle: what customers owe plus inventory, minus what is owed to suppliers. Its change over a period is the working-capital line in free cash flow. |
Profitability
| Basic Earning Power |
Earnings before interest and taxes per unit of assets: the earning power of the assets before financing and tax decisions enter. |
| EBIT |
Earnings before interest and taxes: operating profit plus other income and expenses such as investment income and currency results. It is the profit available to pay lenders, the state and owners. |
| Operating Profit |
What the core business earns: revenue minus the cost of what was sold and the cost of running the company, before financial items, other income and tax. |
| Return on Assets |
How much net profit the company earns per unit of assets it uses, averaged over the period. |
| Return on Capital Employed |
How well the company turns its long-term capital, equity plus long-term debt, into operating earnings. Because it uses EBIT, it compares companies regardless of how they are financed. |
| Return on Equity |
The return owners earn on the capital they have in the business. |
| Return on Sales |
The share of every unit of revenue that remains as operating profit, also called operating margin. |
Leverage and solvency
| Debt Ratio |
The share of assets financed by creditors rather than owners. It and the equity ratio add up to one. |
| Debt to EBIT |
How many years of current earnings it would take to repay interest-bearing debt. |
| Debt to Equity |
How many units of borrowed money, including payables, stand behind each unit of owners’ capital. |
| Equity Ratio |
The share of assets financed by the owners. German lenders watch it closely as the Eigenkapitalquote; a low ratio limits further borrowing. |
| Interest Coverage Ratio |
How many times earnings before interest and taxes cover the interest bill. |
| Net Worth |
What remains for the owners once all liabilities are paid from the assets, at book value. |
Efficiency
| Equity Turnover |
How much revenue the owners’ capital generates. Together with return on sales it explains return on equity: ROE ≈ return on sales × equity turnover, before the difference between operating and net profit. |
| Inventory Turnover |
How many times the average inventory is sold and replaced in the period. 365 divided by the annual figure gives days of inventory on hand. |
| Working Capital Turnover |
How much revenue each unit of net working capital supports. Rising turnover means the business needs less tied-up capital to grow. |
Cash flow
| Free Cash Flow to Equity |
The cash left for the owners after reinvestment and after lenders are served: what could be paid out as dividends without new equity. |
| Free Cash Flow to Firm |
The cash the operations generate after paying tax and reinvesting in fixed assets and working capital: what is available to all providers of capital, lenders and owners. |
Line items
The building blocks of every metric, defined once and mapped to each chart of accounts.
| Cash and cash equivalents |
Cash on hand and in bank accounts, plus deposits that can be withdrawn at short notice without loss of value. |
| Cost of sales |
Direct cost of the goods and services sold in the period. |
| Current assets |
Assets expected to turn into cash within a year: cash, short-term investments, receivables, inventory, prepayments. |
| Current liabilities |
Obligations due within a year: trade payables, short-term borrowings, tax and payroll liabilities, accruals. |
| Equity |
Owners’ stake: share capital, reserves and retained earnings, including the current year’s result. |
| Financial debt |
Interest-bearing borrowings, short- and long-term: bank loans, overdrafts, bonds, lease liabilities. |
| Income tax |
Tax on the period’s profit, current and deferred. |
| Interest expense |
Interest charged on financial debt for the period. |
| Inventory |
Raw materials, work in progress, finished goods and goods for resale, at cost. |
| Net profit |
The period’s result after all income, expenses and taxes. |
| Non-current assets |
Assets held for more than a year: intangible, tangible and long-term financial assets, net of accumulated depreciation. |
| Non-current liabilities |
Obligations due after more than a year, mainly long-term borrowings and provisions. |
| Operating expenses |
Costs of running the business that are not part of the cost of sales: personnel, premises, marketing, administration, depreciation. |
| Other income and expenses, net |
Income and expenses outside the main operations, net: interest and investment income, currency gains and losses, gains and losses on disposals. |
| Revenue |
Net sales of goods and services for the period, after discounts and allowances. |
| Short-term investments |
Marketable securities and deposits held for less than a year that are not cash equivalents. |
| Total assets |
Everything the company owns or controls: non-current plus current assets. |
| Total liabilities |
Everything the company owes to others: current plus non-current liabilities. |
| Trade payables |
Amounts owed to suppliers for goods and services already received. |
| Trade receivables |
Amounts customers owe for goods and services already invoiced. |
Charts of accounts
| Business Central |
The chart of accounts in the Business Central evaluation (CRONUS) company, with Microsoft’s standard G/L account categories. Line items are mapped on categories and inherited by every account below them; individual accounts add line items where a category is too coarse, and a category or account can exclude a line item it would otherwise inherit. |
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