In short: The most important financial metrics come from four areas: liquidity (for example the quick ratio), capital structure (equity ratio, working capital), profitability (EBITDA margin, return on sales) and cash flow (free cash flow margin). Track these figures every month and you will spot cash shortfalls and weak margins early enough to act.
Financial metrics show in a handful of numbers how a company is doing: whether the money will last for the next few months, how soundly the business is financed and whether it actually makes a profit. This article explains the key ratios with their formulas and how to read them. They are also the basis for planning your next steps.
Key takeaways
- Liquidity decides whether a company can pay its bills on time. Even profitable companies can fail for lack of cash.
- A balanced mix of equity and debt makes you less dependent on banks and investors.
- Profitability ratios show how much of your revenue is left as profit and where costs are too high.
Financial metrics at a glance
Keep an eye on these eight metrics at all times. In PE- and VC-backed companies they are usually part of the monthly board reporting, and some are tied directly to covenants in the loan agreement.
- Quick ratio (acid-test ratio): (cash + short-term receivables + marketable securities) / current liabilities. Rule of thumb: at least 100 %.
- Equity ratio: equity / total capital × 100 %. Shows how soundly the company is financed. What counts as a good value depends heavily on the industry.
- Working capital: current assets − current liabilities. Shows how much capital is tied up in day-to-day operations.
- EBITDA margin: EBITDA / revenue × 100 %. Makes operating earning power comparable, regardless of financing, taxes and depreciation.
- Return on sales: profit / revenue × 100 %. Shows how much of each euro of revenue is left as profit.
- Return on equity (ROE): net income / average equity × 100 %. Measures the return on the owners' capital.
- Free cash flow margin: free cash flow / revenue × 100 %. Shows how much money is left after running costs and investments. It is harder to influence through accounting choices than pure profit margins.
- Fixed asset coverage ratio II: (equity + long-term debt) / fixed assets × 100 %. Rule of thumb: 100 % or more.
Below we look more closely at liquidity, capital structure, profitability and fixed asset coverage.
Liquidity: the basis of financial stability
What liquidity means
Liquidity describes whether a company can make its payments when they fall due. It also covers how quickly assets can be turned into cash: a bank balance is available immediately, receivables after a few weeks, machinery or property only at a steep discount if you need to sell quickly.
Ratios for measuring liquidity
Three ratios are common:
- Cash ratio: cash / current liabilities. Shows what share of short-term debt could be paid immediately.
- Quick ratio: (cash + short-term receivables) / current liabilities. A value below 100 % can point to a shortfall.
- Current ratio: current assets / current liabilities. Also includes inventory.
How to calculate all three step by step, and which benchmarks are realistic, is covered in Liquidity ratios: cash, quick and current ratio.
How to improve liquidity
- Plan liquidity on a rolling basis, for example with a 13-week cash flow forecast.
- Invoice as soon as the work is done and chase overdue payments consistently. This shortens the time until the money arrives.
- Take early-payment discounts from suppliers when you have the cash. The saving is usually bigger than the interest on a credit line.
- Act early if the quick ratio drops below 100 %.
- For short-term gaps, a higher credit line from your bank can help.
- For lasting gaps you need more equity or long-term debt.
Cash gets tight especially during growth: receivables and inventory rise, while suppliers and salaries still have to be paid on time.
Liquidity planning therefore matters for every company, whatever its size. Without enough cash, even a profitable company can become insolvent.
Capital structure: the balance of equity and debt
The equity ratio and why it matters
The equity ratio shows what share of total capital is equity. A high ratio makes a company more resilient and strengthens its negotiating position with banks and investors. The benefits at a glance:
- more freedom to make decisions
- less dependence on lenders
- a buffer for weak months
- investments can be funded from your own resources
- more security in economic downturns
- lower interest costs
Debt-to-equity ratio and its effects
The debt-to-equity ratio compares borrowed capital with equity. A high value increases risk. It can still pay off if the borrowed money goes into investments that earn more than the interest costs. So always factor the interest in. The different funding routes are covered in our article on convertible loans versus equity rounds.
Optimising your capital structure
These points help:
- Review income and expenses regularly
- Fund long-term assets with long-term capital
- Consider alternatives such as leasing
- Only take on debt when it has a clear purpose
Profitability: the key to long-term success
Without profit, no company can survive in the long run. Three ratios show how profitable it is:
- EBITDA margin: shows operating earning power before interest, taxes, depreciation and amortisation. Well suited for comparing companies with different financing.
- Return on sales: shows how many cents of profit are left from each euro of revenue.
- Return on equity: shows the return on the owners' money.
More terms are explained in our finance glossary.
Fixed asset coverage: funding long-term investments soundly
What fixed asset coverage means
Fixed asset coverage means that fixed assets – machinery, buildings or software, for example – are financed with long-term capital. If you pay for long-term investments with short-term loans, you risk a squeeze as soon as those loans fall due.
Ratios for assessing fixed asset coverage
Two ratios are common (in German practice they are called Anlagedeckungsgrad I and II):
- Fixed asset coverage ratio I: equity / fixed assets × 100 %. Shows what share of fixed assets is covered by equity.
- Fixed asset coverage ratio II: (equity + long-term debt) / fixed assets × 100 %. The rule of thumb is a value of at least 100 %.
Ways to improve fixed asset coverage
- Long-term funding: finance long-term investments with long-term money.
- Leasing: lease assets instead of buying them to protect liquidity.
- Strengthen equity: for example through capital increases or retained earnings.
If your team lacks the time to set these metrics up properly and report them every month, interim support for accounting and FP&A can close the gap. Costs are listed on our pricing page.
Conclusion
You do not need 30 metrics. For most companies the eight in the overview above are enough, calculated monthly and compared with the previous month and the plan. What matters is not the single value but the trend: if the quick ratio falls for several months in a row or the margin shrinks, that is the moment to act.
Further reading
Go deeper: Interim management in the finance department – roles, process and the first 90 days. The terms covenant and degree of automation are defined in the finance glossary. Our services are described on the CFO as a Service & Finance as a Service page.
Frequently asked questions
Which financial metrics matter most for a company?
The most important metrics come from four areas: liquidity (e.g. the quick ratio), capital structure (equity ratio, working capital), profitability (EBITDA margin, return on sales, return on equity) and cash flow (free cash flow margin). Which one matters most in a given case depends on the business model and growth stage – and for PE- and VC-backed companies often also on the agreed covenants.
Why is liquidity so important for a company?
Liquidity ensures that a company can pay invoices, salaries and loan repayments when they are due. Without it, the company risks insolvency even if it is profitable on paper.
What is the equity ratio?
The equity ratio states what percentage of total capital is equity. The formula is equity / total capital × 100 %. A high ratio is seen as a sign of stability and independence from lenders.
How can a company improve its profitability?
The main levers are prices, costs and productivity. First check which products or customers bring in the least margin and start there. Comparing the EBITDA margin month by month shows you whether the measures are working.
