Why use performance indicators or KPIs?
Performance indicators, also known as KPIs (Key Performance Indicators), are essential tools in accounting. They allow companies to assess their efficiency, profitability, and solvency. By measuring and analyzing these indicators, it will be easier for you to make informed decisions, anticipate risks, and optimize your company's resources.
Profitability indicators
A company's profitability is a key criterion for measuring its economic success. Profitability indicators analyze the efficiency with which a company uses its resources to generate profits.
Gross margin
This indicator shows the proportion of sales remaining after deduction of the direct costs of production or purchase of goods sold.
Gross margin =
A high gross margin means that the company is efficient in managing its production costs and can generate enough revenue to cover its fixed and operating costs.
If the gross margin is low, this may indicate that production costs are too high in relation to sales prices, or that the company is engaged in overly aggressive competition that reduces its margins. It is therefore essential to optimize purchasing, production and logistics costs to maintain a good gross margin.
Net margin
It indicates the percentage of sales that turns into profit after all expenses (fixed costs, taxes, interest, etc.) have been deducted.
Net margin =
Net income
A high net margin means that the company is able to control costs and maximize overall profitability. Conversely, a low net margin can be a sign of fixed costs or excessive financial burdens.
Companies need to keep a close eye on this indicator to identify areas for improvement, such as reducing unnecessary expenditure and optimizing operations.
ROE (Return on Equity)
This indicator measures the profitability for shareholders and investors by comparing net income with invested equity.
ROE (Return on Equity) =
A high ROE is a positive sign, indicating that the company is generating benefits with the funds invested. However, an excessively high ROE can sometimes conceal a high level of debt, as a company can artificially improve its ROE by using financial leverage (borrowing to finance its operations).
Companies must therefore balance their profitability and debt levels to ensure sustainable growth without taking excessive financial risks.
ROA (Return on Assets)
It enables us to assess the efficiency with which the company uses its assets to generate profits.
ROA (Return on Assets) =
A high ROA means that the company efficiently utilizes its resources to generate profit. A low ROA, on the other hand, may indicate that assets are underutilized, investments are not profitable, or the company's cost structure is too heavy.
To improve ROA, a company can optimize the use of its assets, reduce operating costs and maximize the efficiency of its investments.
Liquidity indicators
The liquidity indicators help assess a company's ability to meet its financial obligations in the short term. They are essential for ensuring good cash flow management and avoiding the risk of payment default. A company with poor liquidity risks facing difficulties in paying its suppliers, employees, or operating expenses, which can quickly compromise its viability.
Current ratio
The general liquidity ratio measures a company's ability to cover its short-term debts with its current assets (cash, trade receivables, inventories, etc.).
Current ratio =
A ratio that is too high can also be a sign of poor cash management, suggesting that the company is not efficiently reinvesting its resources. Ideally, this ratio should be greater than 1, meaning that the company has more liquid assets than short-term liabilities.
A ratio that is too high can also be a sign of poor cash management, suggesting that the company is not reinvesting its resources efficiently. Ideally, this ratio should be greater than 1This means that the company has more liquid assets than short-term debts.
Immediate liquidity ratio
Ce ratio est une version plus stricte du ratio de liquidité générale, car il exclut les stocks des actifs courants. Il se concentre uniquement sur les actifs immédiatement convertibles en liquidités, comme la trésorerie et les créances clients.
Immediate liquidity ratio =
(Cash + Marketable securities)
A high quick liquidity ratio means that the company can quickly repay its debts without having to sell its inventory. A ratio that is too low indicates an excessive dependence on inventory sales, which can be risky in case of a drop in demand or difficulties in moving goods.
This ratio is particularly important for companies with long sales cycles or operating in sectors where inventory does not sell quickly (e.g. real estate, heavy industry).
Working capital requirement (WCR)
The WCR represents the difference between current assets (inventories, trade receivables) and current liabilities (trade payables, current expenses). It indicates whether a company needs financing for its day-to-day business.
Working capital requirement (WCR) = (in euros)
A positive WCR means that the company needs to finance its operating cycle, which may require borrowing or rigorous management of trade receivables. A negative WCR indicates that the company is financed by its suppliers and does not need additional cash to operate, which is a positive sign of financial management.
Companies need to optimize their working capital management by reducing customer payment times and negotiating favorable terms with their suppliers.
Operating cash flow
Operating cash flow =
A positive cash flow means that the company is able to finance its activities with its own resources. A negative cash flow indicates excessive cash consumption, which may require external financing.
Companies need to keep a constant eye on this indicator to avoid cash flow tensions and ensure they have the resources they need to invest and grow.
Solvency indicators
Debt-to-equity ratio
The indebtedness ratio measures a company's level of debt in relation to its equity. It measures the extent to which a company is financed by debt rather than by its own resources.
Debt-to-equity ratio =
In case of low ratio (< 1), the company is mainly financed by its own capital, which reduces its financial risk.
If the ratio is greater than 1, the majority of the company's financing comes from borrowing, which can be risky in the event of financial difficulties or rising interest rates.
A very high ratio (> 2 or 3) indicates that the company is over-dependent on debt and may have difficulty repaying its creditors.
A company must maintain a balanced debt-to-equity ratio. Too little debt may indicate a lack of investment, while too much debt increases the risk of default.
Cash flow from operations (CAF)
The cash flow from operations (CAF) measures the amount of cash a company is able to generate through its activities. It represents the internal resources available to finance investments, repay debts and remunerate shareholders.
Cash flow from operations =
Interpreting indicators in their entirety
A single indicator is not enough to reliably assess a company's financial health. When taken in isolation, an indicator may provide a distorted view of the company's actual situation. For example, high profitability may conceal a cash flow problem if the company lacks liquidity to pay its suppliers. Similarly, low debt levels may seem reassuring but could also indicate a lack of investment and dynamism.
This is why it is essential to analyze these indicators as a whole, taking into account the industry, economic trends, and the company's strategy. Only a comprehensive approach allows for informed decision-making and ensures effective and sustainable financial management.
