Essential Metrics for Evaluating Business Health

What makes a strong credit assessment? Imagine sitting across the table from a business owner seeking a loan to grow their operations. You’re reviewing their financials, trying to answer the big question: Can they repay this loan comfortably? This is where credit metrics and lending ratios become your compass. As a commercial lender, these numbers tell the real story behind a company’s financial health. For instance, EBITDA margin and net margin give insights into profitability. Cash flow projections highlight liquidity, and conditional formatting in forecasts can flag risks like negative cash balances before they spiral out of control. Take the Debt Service Coverage Ratio (DSCR) it’s not just about how much money they’re making but whether their income comfortably covers debt payments. Or consider the current ratio a quick glance at their ability to handle short-term obligations. Add in leverage metrics like liabilities-to-equity and debt-to-EBITDA, and you’ve got a comprehensive picture of financial stability. Here’s why it matters: According to a recent study by S&P Global, businesses with a DSCR below 1.2 are five times more likely to default compared to those above that threshold. Similarly, Cash flow analysis has been shown to reduce lending risk by up to 30%, according to McKinsey & Co. These aren’t just numbers they’re lifelines for risk management. As lenders, understanding these metrics means we’re not just handing out loans; we’re supporting sustainable business growth. How do you approach credit metrics in your role? Do you prioritize specific ratios, or do you take a holistic approach? Let’s share insights and learn from each other in the comments. #Finance #CreditMetrics #LendingRatios #RiskManagement

How to read Financial Statements (master this) 1. Start with the Cash Flow Statement Begin by reviewing the cash flow statement to see how the company generates and uses cash. It's divided into operating, investing, and financing activities, giving you a clear picture of cash movement. 2. Beware of Earnings Metrics Profits can be misleading due to various adjustments and manipulations. Focus on revenue as it is a cleaner indicator of business performance. Look out for one-time items and aggressive accounting practices. 3. Examine the Balance Sheet The balance sheet shows the company's financial position, including assets, liabilities, and equity. Pay attention to working capital, debt levels, and asset efficiency. A healthy balance sheet has a strong mix of assets and liabilities. 4. Connect the Dots Link changes in the balance sheet to the cash flow and income statements. For example, an increase in accounts receivable should match an increase in revenue and a decrease in cash flow from operations. Understanding these connections is crucial. 5. Analyze Ratios and Trends Use financial ratios to assess the company's health and performance. Key ratios include liquidity (current ratio), efficiency (asset turnover), solvency (debt-to-equity), and profitability (gross margin). Track these ratios over time to spot trends. 6. Understand the Industry Context Compare the company's financials to industry benchmarks and competitors. This context helps identify strengths, weaknesses, and potential opportunities. Different industries have unique financial characteristics, so use relevant benchmarks. 7. Ask Questions If something isn't clear, dig deeper. Reach out to the company's management, investor relations, or experts. Annual reports, earnings call transcripts, and SEC filings provide additional context. -- P.S. I'm Warren Wang, CEO and founder of Doublefin. Previously, I spent 12 years at Google in finance leadership roles, including Corp FP&A and as a finance director managing multi-billion-dollar marketing investments with a global team of 40 managers and analysts.

20 profit ratios that will transform how you analyze any business The numbers never lie, but you need to know how to read them 📊 Let me break down the most critical financial metrics you'll ever need 👇 ➡️ CORE PROFITABILITY RATIOS These ratios tell you exactly how well a business turns revenue into profit: 1️⃣ Gross Profit Margin The foundation of business profitability - what's left after direct costs. When this number drops, it's often the first sign of pricing pressure or rising material costs. 2️⃣ Operating Profit Margin This strips away the noise and shows pure operational performance. Want to know if a business is actually good at what it does? This ratio tells you. 3️⃣ Net Profit Margin The bottom line that matters. Shows exactly what you're left with after everything's paid. 4️⃣ EBITDA Margin Strips out accounting decisions to show true operational performance. Critical for comparing companies with different capital structures. ➡️ RETURN RATIOS - THE REAL PERFORMANCE INDICATORS 5️⃣ Return on Equity Your shareholders' report card. This number can make investors either jump for joy or run for the hills. 6️⃣ Return on Assets  Shows how well a company uses its assets to generate profits. This ratio becomes crucial when comparing asset-heavy industries. 7️⃣ Return on Capital Employed The heavyweight champion of performance metrics. It's like ROE and ROA had a super-smart baby. ➡️ EFFICIENCY RATIOS Now we're getting to the good stuff… 8️⃣ Asset Turnover Reveals how efficiently a company generates sales from its assets. Higher ratios usually mean better operational efficiency. Think of this as your business's speedometer. The faster it spins, the more efficient you are. 9️⃣ Inventory Turnover Critical for retail and manufacturing - shows how quickly inventory moves. Lower numbers might signal obsolete stock or poor purchasing decisions. 🔟 Accounts Receivable Turnover Measures how fast a company collects what it's owed. This ratio directly impacts cash flow - the lifeblood of any business. ➡️ MARKET PERSPECTIVE RATIOS 1️⃣1️⃣ P/E Ratio The market's expectation of growth packed into one number. But remember - high P/E isn't always better. It's about whether the company can meet those expectations. 1️⃣2️⃣ EPS Growth Shows the rate of earnings growth per share. This becomes powerful when tracked over multiple quarters. === Three principles I always follow when using these ratios: 1. Compare within industries - ratios mean different things in different sectors 2. Look for trends - a single number means nothing without context 3. Use multiple ratios - they work together to tell the complete story Which ratio do you find most valuable in your analysis? Share your thoughts in the comments below 👇

Decoding Financial Health in 5 Key Areas Ratio analysis is a powerful tool for investors, analysts, and business owners alike, offering a quantitative window into a company's financial performance. By examining relationships between various financial figures, ratios uncover hidden insights that go beyond raw numbers. Let's dive into the five essential types of ratios that illuminate different facets of a company's financial health: 𝟏. 𝐋𝐢𝐪𝐮𝐢𝐝𝐢𝐭𝐲 𝐑𝐚𝐭𝐢𝐨𝐬: 𝐓𝐡𝐞 "𝐂𝐚𝐧 𝐘𝐨𝐮 𝐏𝐚𝐲 𝐘𝐨𝐮𝐫 𝐁𝐢𝐥𝐥𝐬?" 𝐓𝐞𝐬𝐭 Focus: Short-term debt payment ability Key Ratios: Current Ratio, Quick Ratio Insight: How easily can a company cover immediate debts with available cash and assets? A higher ratio signals stronger liquidity. 𝟐. 𝐒𝐨𝐥𝐯𝐞𝐧𝐜𝐲 𝐑𝐚𝐭𝐢𝐨𝐬: 𝐓𝐡𝐞 "𝐋𝐨𝐧𝐠-𝐓𝐞𝐫𝐦 𝐒𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲" 𝐂𝐡𝐞𝐜𝐤 Focus: Long-term debt management and financial risk Key Ratios: Debt-to-Equity Ratio, Interest Coverage Ratio Insight: Is a company overly reliant on borrowed money? Can it comfortably meet long-term obligations? Lower ratios generally indicate better solvency. 𝟑. 𝐏𝐫𝐨𝐟𝐢𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐑𝐚𝐭𝐢𝐨𝐬: 𝐓𝐡𝐞 "𝐌𝐚𝐤𝐢𝐧𝐠 𝐌𝐨𝐧𝐞𝐲" 𝐌𝐞𝐭𝐞𝐫 Focus: Earnings generation effectiveness Key Ratios: Gross Profit Margin, Net Profit Margin, Return on Assets (ROA), Return on Equity (ROE) Insight: How efficiently is a company turning sales into profit? How well are assets and investments generating returns? Higher ratios indicate better profitability. 𝟒. 𝐄𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐜𝐲 𝐑𝐚𝐭𝐢𝐨𝐬: 𝐓𝐡𝐞 "𝐑𝐞𝐬𝐨𝐮𝐫𝐜𝐞 𝐎𝐩𝐭𝐢𝐦𝐢𝐳𝐚𝐭𝐢𝐨𝐧" 𝐆𝐚𝐮𝐠𝐞 Focus: Resource utilization for sales and profit Key Ratios: Inventory Turnover Ratio, Accounts Receivable Turnover Ratio, Days Sales Outstanding (DSO) Insight: How quickly does inventory sell? How fast are receivables collected? Efficient operations are key to maximizing profitability. 𝟓. 𝐕𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧 𝐑𝐚𝐭𝐢𝐨𝐬: 𝐓𝐡𝐞 "𝐒𝐭𝐨𝐜𝐤 𝐌𝐚𝐫𝐤𝐞𝐭 𝐕𝐚𝐥𝐮𝐞" 𝐂𝐨𝐦𝐩𝐚𝐬𝐬 Focus: Stock value relative to earnings or assets Key Ratios: Price-to-Earnings Ratio (P/E Ratio), Price-to-Book Ratio (P/B Ratio) Insight: Is a company's stock underpriced, overpriced, or fairly valued compared to its financial performance or book value? Each type of ratio contributes a unique perspective, allowing you to piece together a comprehensive picture of a company's financial health. You can identify trends, strengths, weaknesses, and potential risks by comparing ratios across different periods, industries, or competitors. Ratios are most informative when used in combination and interpreted within the broader context of a company's operations and industry landscape. Want to discuss how fractional CFO services can support your future growth? Schedule a meeting with me directly here:https://lnkd.in/ehiZ-VUT. I look forward to ourconversation.