Although you may already know and use several financial analysis metrics, are you getting the most out of them? There is a big difference between knowing and understanding these metrics and this can be the key to successful business strategies. Below we detail 6 common financial analysis metrics including how to calculate, analyse, and act on your findings.
- Net profit margin
Net profit margin is a great way to track your company’s growth, productivity, and efficiency. This metric works best when it is tracked over time, ideally in a line chart. Tracking helps to identify trends and the effects of business decisions and changes within the company.
- Rate of Return
Rate of return is another effective ratio to use when you are conducting financial analysis. Rate of return is expressed as a percentage and looks into the net gain or loss on an investment over a certain period of time. This can be a powerful tool when planning for the future in your business because it helps to identify successful investments and where you should focus your capital moving forward. Benchmarking a minimum projected rate of return can safeguard your company from risky investments and help guide your investment decisions.
- Average Annual Growth Rate
Average annual growth rate (AAGR) is often confused with compound annual growth rate (CAGR). Each of these tools have different purposes and meanings so understanding the difference is essential to accurate financial analysis. The main difference is that AAGR is best used as a short-term metric to measure the growth for a particular year. CAGR is used for multiple years.
- Operating Profit Margin
If you are trying to see how your company is performing compared to the industry leaders, operating profit margin is an excellent tool to use. Operating profit margin can also be known as return on sales and it highlights the amount of revenue that is available to cover non-operating costs. Operating profit margins are great to track business risk and determine which projects are adding the most to your bottom line.
- Return of Equity
Return on equity or ROE is also known as return on net assets and it is used to measure how effectively assets are being utilised to create profit. ROE varies dramatically between industries so it is essential to compare your business to similar companies in the same industry. It is a good idea to aim for a ROE greater than or equal to the average of your immediate competition or industry peers.
- Return on Assets
To measure your profitability based on your assets, Return on assets or ROA is the perfect metric to use. This metric helps you to see how efficiently you are using your assets to generate income and is displayed as a percentage. ROA is one of the easiest ways for businesses to measure the effectiveness of their operations. This is an essential metric when you are reviewing your performance and strategy.
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