Traditional Culture Encyclopedia - Traditional virtues - What are the indicators used to determine the financial health of a business? Such as profitability

What are the indicators used to determine the financial health of a business? Such as profitability

China's "General Principles of Enterprise Finance" in the three financial indicators for enterprises are: solvency indicators, including gearing, current ratio, quick ratio; operating capacity indicators, including accounts receivable turnover, inventory turnover; profitability indicators, including capital margins, sales margins (profit and tax rate on operating income), cost and expense margins and so on.

1, gearing ratio: is used to measure the ability of enterprises to use creditors to provide funds for business activities, as well as reflecting the creditors to issue loans to the degree of security of the indicators, through the enterprise's total liabilities compared with the total amount of assets, reflected in the total assets of the enterprise belongs to the debt ratio.

2, current ratio: in general, the higher the current ratio, the stronger the short-term solvency, from the creditor's point of view, the higher the current ratio, the better; from the point of view of the business operator, too high a current ratio, which means that the increase in opportunity cost and the decline in profitability.

3, quick ratio: in general, the higher the quick ratio, the stronger the solvency of the enterprise; but because of the enterprise cash and accounts receivable occupy too much and greatly increase the opportunity cost of the enterprise.

4, accounts receivable turnover: the average number of times a company's accounts receivable are converted to cash within a certain period. Accounts receivable turnover rate expressed in time for the accounts receivable turnover days, also known as the average accounts receivable recovery period or average collection period. It indicates the time it takes for a company to go from acquiring rights to accounts receivable to collecting the money and turning it into cash.

5, inventory turnover: a certain period of time the cost of goods sold and the ratio of the average inventory balance. Used to reflect the speed of inventory turnover, that is, the liquidity of inventory and inventory of funds occupied by the amount is reasonable, to promote enterprises to ensure the continuity of production and operation at the same time, improve the efficiency of the use of funds to enhance the short-term solvency of the enterprise.

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Most traditional performance evaluations of companies use financial status indicators, and evaluating performance using financial indicators is simple and straightforward. However, there are the following shortcomings in using only financial indicators to evaluate the performance of managers:

1. Financial indicators are oriented to the past but do not reflect the future, which is not conducive to evaluating the performance of enterprises in the ability to create future value.

2. Financial indicators are easy to manipulate, focusing too much on accounting profits in corporate financial reports, which makes corporate management use various methods to manipulate profits.

3, financial indicators mainly from the financial statement information, does not contain most of the factors that affect the long-term competitive advantage of the enterprise, such as product quality, the quality of employees and skills, and can not reflect the business process and customer satisfaction.

Baidu Encyclopedia - Financial Indicators

Baidu Encyclopedia - Gearing Ratio

Baidu Encyclopedia - Accounts Receivable Turnover Ratio

Baidu Encyclopedia - Inventory Turnover Ratio