In the dynamic world of business, financial metrics are pivotal for both listed and non-listed companies. However, non-listed or startup companies often face unique challenges, operating without the advantage of stock market valuations. For these businesses, understanding financial health goes beyond mere numbers.
Ratios play an indispensable role, offering insights into solvency, liquidity, and operational efficiency. However, interpreting these metrics in the context of a non-listed company's individual landscape is where the real challenge—and opportunity—lies when Co-Founders are dealing with banks and investors.
This guide elucidates the top 10 financial ratios tailored for non-listed companies, emphasizing their unique characteristics and offering industry-specific benchmarks.
Current Ratio
Measures a company's ability to pay its short-term liabilities using its short-term assets. A high current ratio indicates better liquidity and financial health.
Current ratio = Current Assets / Current Liabilities
Target (range):
Manufacturing: 1.5 - 2.5
Retail: 1 - 2
Real Estate: 1 - 2
IT Services: 1.5 - 3
Agriculture: 1.2 - 2
Source of the information in your Balance Sheet items are Current Assets and Current Liabilities.
Debt-to-Equity RATIO
Provides insight into a company's financial leverage. A high ratio might indicate that the company is overburdened by debt, which could be risky. However, some industries naturally have higher debt.
Debt-to-Equity ratio = Total Debt / Total Equity
Target (lower values are favorable):
Manufacturing: < 1.5
Retail: < 1
Real Estate: < 2 (Considering the capital-intensive nature)
IT Services: < 0.5
Agriculture: < 1
Source of the information in your Balance Sheet items are Total Debt (which can be calculated as Total Liabilities or Long-Term Debt + Short-Term Debt) and Total Equity.
Gross Profit Margin
Reveals the portion of money left from revenues after deducting the cost of goods sold. This ratio shows how efficiently a business is producing its goods.
The formula is Gross Margin = Gross Profit / Revenue
Target (lower values are favorable):
Manufacturing: 20% - 35%
Retail: 20% - 50%
Real Estate: 15% - 35%
IT Services: 60% - 80%
Agriculture: 10% - 30%
Source of the information are in the Income Statement (Gross Profit and Revenue), understanding the composition of Current Assets in the Balance Sheet (like Inventories) can offer deeper insights into the cost structure.
Operating Margin
Importance: This ratio tells you how much of every "dollar" of revenue is left over after both the cost of goods and operating expenses are considered. It helps investors understand the operating efficiency of a company. It shows what percentage of revenue remains after deducting operating expenses.
The formula is Operating Margin = Operating Income or Profit / Revenue
Target (higher values are favorable):
Manufacturing: 5% - 15%
Retail: 2% - 10%
Real Estate: 10% - 25%
IT Services: 20% - 35%
Agriculture: 5% - 20%
Source of the information are mainly derived from the Income Statement, but Inventories and Operating Liabilities on the Balance Sheet can provide context. Operating Profit (or Operating Income) can be found on the income statement, or calculated as:
Operating Income = Revenue - Cost of Goods Sold (COGS) - Operating Expenses - Depreciation - Amortization
Return on Assets (ROA)
It measures the profitability relative to a company's assets, indicating how efficient management is at using assets to generate earnings.
ROA = Net Income / Total Assets
Target (higher values are favorable):
Manufacturing: 5% - 15%
Retail: 3% - 15%
Real Estate: 2% - 10%
IT Services: 8% - 20%
Agriculture: 2% - 8%
Source of the information in your Balance Sheet is Total Assets and Net Income (= Total Revenue — Total Expenses) from the Income Statement.
Return on Equity (ROE)
Provides an understanding of how effectively the company is generating returns on the shareholders' equity. A higher ROE can be a sign of effective management or significant risk. Please refer to the dedicated post in this blog if you want to know more.
The formula is ROE = Net Income / Shareholder's Equity
Target (higher values are favorable):
Manufacturing: 5% - 15%
Retail: 3% - 15%
Real Estate: 2% - 10%
IT Services: 8% - 20%
Agriculture: 2% - 8%
Source of the information are derived from the Income Statement and the Balance Sheet. Both Net Income and Sales can be found on a company's Income Statement. Sales is sourced from the Income Statement, while Total Assets and Shareholders' Equity can be found on the company's Balance Sheet.
Inventory Turnover
A crucial metric for businesses that hold inventory. It measures how many times a company has sold and replaced inventory during a period. A high turnover indicates efficient sales processes, while a low turnover might indicate overstocking or less popular products.
The formula is Inventory Turnover = Cost of Goods Sold / Average Inventory.
Target:
Manufacturing: 5 - 10 times/year
Retail: 4 - 12 times/year
Real Estate: Not Applicable
IT Services: Not Applicable
Agriculture: 2 - 6 times/year (Considering seasonal nature)
Source of the information are derived from the Income Statement and the Balance Sheet. Cost of Goods Sold from the Income Statement and Average Inventory is calculated with Begin Inventory + End Inventory divided by 2 from the Balance Sheet.
Net Profit MArgin
Demonstrates the percentage of profit for each "dollar" of revenue. It's a key indicator of a company's profitability.
The formula is Net Profit Margin = Net Profit / Revenue
Target:
Manufacturing: 5% - 10%
Retail: 2% - 8%
Real Estate: 10% - 20%
IT Services: 10% - 25%
Agriculture: 2% - 10%
This ratio mainly uses the Income Statement, with Net Profit and Revenue being the main components. However, various liabilities and assets can provide context into what affects the bottom line.
Interest Coverage Ratio
Assesses a company's ability to manage its debt payments. If the ratio is too low, it may suggest that the company is overburdened by debt payments.
The formula is Interest Coverage = Operating Income / Interest Expense. Generally, a Interest Coverage ratio > 1.5 is considered a good target.
This ratio mainly uses Operating Income from the Income Statement and Interest Expense either from the Income Statement or inferred from the Balance Sheet's debt structure.
Quick Ratio (Acid Test)
Unlike the Current Ratio, the Quick Ratio excludes inventories from current assets. It offers a more stringent assessment of a company's short-term liquidity position.
The formula is Quick Ratio = (Current Assets - Inventories) / Current Liabilities.
Target:
Manufacturing: 1 - 1.5
Retail: 0.5 - 1
Real Estate: 0.7 - 1.2
IT Services: 1.2 - 2.5
Agriculture: 0.8 - 1.5
The source of the information in your Balance Sheet are Current Assets (excluding Inventories) and Current Liabilities.
In Essence
Financial ratios are more than just numbers on a paper; they are the heartbeat of a business, indicating its health, strengths, and areas that require attention. For companies navigating the complexities of financial health can be a daunting task. These ratios offer a structured approach to understand the pulse of the business. However, merely knowing these metrics isn't always enough.
Interpretation, strategic decision-making based on these ratios, and consistent monitoring are vital. Embracing resources and expertise in these areas will go a long way. Always remember, while tools and methodologies are crucial, it's the resilience, adaptability, and informed decision-making that will steer a company towards success.
what can yixu help you with
While many companies can calculate these ratios, understanding their implications and making strategic decisions based on them is a challenge. YIXU could offer expert insights here. Just as one would with a doctor, businesses could benefit from routine financial assessments.
Beyond just the numbers, YIXU could offer recommendations on actions to take based on the ratios – for example, debt restructuring suggestions if the Debt-to-Equity ratio is too high, Financing structures to support growth, and more.
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