Financial ratios can help to make sense of the overwhelming amount of informations. A CFO has to understand what the financial keys are detemining and what can the next action plan in accordance to same. Hence undoubtedly financial ratios analysis is one of the most important arts that an CFO should practice timely. Below 5 keys financial ratios that CFO should review timely:
- Return on Equity (ROE):
Return on Equity = Net Income / Average Stockholder Equity
-> It tells you how good a company is at rewarding its shareholders for theirinvestment and CFO has to be taken care on this part.
2. Debt to Equity Ratio:
Debt Equity Ratio: Total Liabilities / Total Shareholders funds
-> It measures the relationship between the amount of capital that has been borrowed and the amount of capital contributed by shareholders (i.e. equity). Generally speaking, if a firm's debt-to-equity ratio increases, it becomes more risky because if it becomes unable to meet its debt obligations, hence this ratio has to be taken care properly , and take action for immediate and long term remedial causes and safe.
3. Debt Collection Period :
Debt Collection Period :Debtors / Sales x 365 days
-> It helps to know the collection period of time , timely and proper collection of debt is one the major role of CFO which can lead the business.
4. Credit Payable Period :
Creditors / Sales x 365 days
-> It helps to know the credit period time for credit payment , timely payment to creditors is one of major KPI of company.
5. Current Ratio:
Current Ratio: Current Assets / Current Liabilities
-> It measures co. abilities to pay the current liabilities with short term assets
Timely preparation of company reports , monthly , quarterly , yearly , CFO of a company should not miss these few analysis and take immediate plans and action to minimize the risk , maximize the returns to investors.
FAQs
Ratios include the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE). Most ratios are best used in combination with others rather than singly to accomplish a comprehensive picture of a company's financial health.
What ratios does CFO look at? ›
-> It tells you how good a company is at rewarding its shareholders for their investment and CFO has to be taken care on this part.
- Debt to Equity Ratio: Debt Equity Ratio: Total Liabilities / Total Shareholders funds. ...
- Debt Collection Period : ...
- Credit Payable Period : ...
- Current Ratio:
5 Essential Financial Ratios for Every Business. The common financial ratios every business should track are 1) liquidity ratios 2) leverage ratios 3)efficiency ratio 4) profitability ratios and 5) market value ratios.
What are the 5 profitability ratios? ›
Remember, there are only 5 main ratios that you must be measuring:
- Gross profit margin.
- Operating profit margin.
- Net profit margin.
- Return on assets.
- Return on equity.
The following five (5) major financial ratio categories are included in this list.
- Liquidity Ratios.
- Activity Ratios.
- Debt Ratios.
- Profitability Ratios.
- Market Ratios.
The CFO helps with shaping portfolio strategies, undertaking major investment and financing decisions, and communicating with key stakeholders—all while leading a multitalented and technologically savvy finance team. Communication is a key part of the role, both with investors and boards.
What are the main priorities of a CFO? ›
Strategic Planning and Execution
Setting long-term yet feasible financial goals. Analyzing the business environment to identify potential growth opportunities. Developing and executing financial strategies in line with the company's objectives. Organizing and leading cross-functional teams to achieve goals.
How should a CFO be measured? ›
The biggest indicator of a great CFO is the ability to drive financial strategy and deliver sustainable growth. Metrics like team leadership and risk management are important too, but the most essential success metrics of a CFO is, undoubtedly, a business' financial health.
What are the five ratio analysis? ›
Profitability ratios, solvency ratios, liquidity ratios, turnover ratios, and earning ratios are five types of ratio analysis. Financial analysis in companies can benefit from various types of ratio analysis. Top management can use it as a crucial tool for strategic business planning.
What is the rule of 5 financial? ›
The 5% rule says as an investor, you should not invest more than 5% of your total portfolio in any one option alone. This simple technique will ensure you have a balanced portfolio.
Answer and Explanation: Financial ratios can be classified into five categories, namely liquidity, activity, profitability, solvency (debt), and market ratios. Each category differs from one another.
What are the 5 Ps of profitability? ›
Profitability is affected by a variety of factors, not all of which are strictly financial. I call these factors the “Five Ps” of business success: Product, Pricing, People, Process, and Planning.
What are the key liquidity ratios? ›
The three types of liquidity ratios are the current ratio, quick ratio and cash ratio. These are useful in determining the liquidity of a company.
What are the three most essential ratios to check a company's financial strength? ›
Operating Cash Flow Ratio: A measure of how many times an organization can cover current liabilities from operating activities. Current Ratio: Measures your ability to pay short-term obligations over twelve months. Quick Ratio (Acid Test Ratio): Evaluates the number of liquid assets available to cover liabilities.
What are the four main categories of financial ratios? ›
Although there are many financial ratios businesses can use to measure their performance, they can be divided into four basic categories.
- Liquidity ratios.
- Activity ratios (also called efficiency ratios)
- Profitability ratios.
- Leverage ratios.
Price-to-Earnings Ratio (P/E)
This is a valuation ratio that compares a company's current share price to its earnings per share. It measures how buyers and sellers price the stock per $1 of earnings. The P/E ratio gives an investor an easy way to compare one company's earnings with those of other companies.
