Financial Performance Metrics and Cash Flow Analysis

Key Financial Ratios and Formulas

Understanding key financial ratios is crucial for assessing a company's performance and financial health. Below are common ratios and their formulas:

Accounts Receivable Turnover Ratio

Accounts Receivable Turnover = Sales & Service Revenue / Accounts Receivable Balance

Accounts Receivable Turnover in Days

Accounts Receivable Turnover in Days = 365 / Accounts Receivable Turnover

Inventory Turnover Ratio

Inventory Turnover = Cost of Goods Sold (CGS) / Inventory Balance

Inventory Turnover in Days

Inventory Turnover in Days = 365 / Inventory Turnover

Current Ratio

Current Ratio = Current Assets (CA) / Current Liabilities (CL)

Quick Ratio (Acid-Test Ratio)

Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities

Debt Ratio

Debt Ratio = Total Liabilities / Total Assets

Debt-to-Equity Ratio

Debt-to-Equity Ratio = Total Liabilities / Total Equity

Gross Profit Margin Percentage

Gross Profit Margin % = Gross Profit / Net Sales Revenue

Gross Profit = Net Sales Revenue - Cost of Goods Sold (CGS)

Net Profit Margin

Net Profit Margin = Net Income / Total Revenue

Asset Turnover Ratio

Asset Turnover = Total Revenue / Total Assets

Equity Multiplier

Equity Multiplier = Total Assets / Total Equity

Return on Equity (ROE)

Return on Equity = Net Income / Total Equity

Price-to-Earnings (P/E) Ratio

P/E Ratio = Market Price Per Share / Earnings Per Share (EPS)

Book Value Per Share

Book Value Per Share = Total Equity / Number of Common Shares Outstanding at Year-End

Understanding Cash Flow Statement Activities

The Statement of Cash Flows categorizes cash movements into three main types of activities:

Operating Activities

Operating Activities include all transactions and other events that are not investing or financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income.

Typical Cash Inflows from Operating Activities

• Sales of goods or services
• Returns on loans (interest received)
• Returns on equity securities (dividends received)

Typical Cash Outflows from Operating Activities

• Payments for acquisitions of inventory
• Payments to employees
• Payments for government taxes
• Payments of interest expense
• Payments to suppliers for other operating expenses

Investing Activities

Investing Activities include lending money and collecting on those loans, and acquiring and selling investments and productive long-term assets.

Typical Cash Inflows from Investing Activities

• Receipts from loans collected
• Sales of debt or equity securities (investments) of other corporations
• Sales of property, plant, and equipment

Typical Cash Outflows from Investing Activities

• Loans to other entities
• Purchases of debt or equity securities of other entities
• Purchases of property, plant, and equipment

Financing Activities

Financing Activities include cash flows relating to liability and owner’s equity.

Typical Cash Inflows from Financing Activities

• Sales of equity securities
• Sales of bonds, mortgages, notes, and other short- or long-term borrowings

Typical Cash Outflows from Financing Activities

• Payments of dividends
• Reacquisition of the firm’s capital stock
• Repayment of amounts borrowed