Financial Ratios - The Strategic CFO® (2024)

FAQs

Financial Ratios - The Strategic CFO®? ›

Financial ratios are derived from the three financial statements; Balance Sheet, Income Statement and Statement of Cash Flows. Financial ratios are used in Flash Reports to measure and improve the financial performance of a company on a weekly basis.

CFOs analyze the D/E ratio to strike a balance between optimizing capital structure and demonstrating financial stability to shareholders and potential investors. In private companies, the D/E ratio serves as a strategic tool for capital allocation decisions, risk assessment, and long-term financial planning.

Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when performing financial ratio analysis is trend analysis.

It is calculated by dividing the cash flows from the company's operations by its current liabilities. Cash flow from operations involves cash from the company's prime business operations. Cash Flow to Debt Ratio=Cash Flow from Operations/ Total Outstanding Debt.

This ratio is otherwise known as quality of earnings ratio. It is computed by dividing CFO by Profit After Tax (PAT or Net Income) of a firm. If CFO exceeds the net income, then it is considered the firm can convert its accounting (accrual) earnings into cash. Else, the firm has poor cash flow management practices.

The two metrics a CFO should always monitor depends on their industry. However, two really important metrics for the CFO are the Return on Investment (ROI) and Operating Cash Flow. ROI measures the profitability of investments and is crucial for assessing the efficiency of spending.

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.

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.

Operating cash flow margin is a cash flow ratio that measures cash from operating activities as a percentage of total sales revenue in a given period. Like operating margin, it is a trusted metric of a company's profitability and efficiency and its earnings quality.

How is CFO performance measured? ›

The board of directors and executive leadership team should measure the performance of a CFO. How can you measure the performance of a CFO? Performance of a CFO can be measured by assessing financial results, strategic contributions, and effective risk management.

The Cash From Operations to Sales is a ratio that tells investors how capable a company is of generating cash from sales. Investors often see a higher value of the ratio to be better for the company, similar to how they view high profit margins as better than low profit margins.

The problem arises when a company is not able to translate these 'notional' profits into cash profits. One ratio that can help in spotting such companies is CFO to EBITDA (earnings before interest, taxes, depreciation and amortisation). Cash flow from operations (CFO) are relatively difficult to manipulate.

Here's the formula to calculate a company's net CFO using the indirect method: Net cash from operating activities = Net income +/− depreciation and amortization +/− Change in working capital.

CFO Equity: How Much Equity Could a CFO Expect? Typically, CFOs might expect to receive between . 1% and 3% of a company's value. In some cases, it may be much more, depending on the stage at which the CFO joins the executive leadership or founders.

The cash flow-to-debt ratio compares a company's generated cash flow from operations to its total debt. The cash flow-to-debt ratio indicates how much time it would take a company to pay off all of its debt if it used all of its operating cash flow for debt repayment (although this is a very unrealistic scenario).