What is the ratio of total wealth to debt

Important business figures

Return on Investment or Return on Investment

The return on investment (ROI) measure of profitability expresses the company's success in relation to its operating assets ("investment"). The ROI figure is calculated from the product of the return on sales and the turnover rate of the operational assets.

Since the operational assets are matched by an equally high capital, this figure also corresponds to the return on the total investment capital, the total return on capital. This answers the question: How much is left for the money invested? In order to be able to understand the origin of the ROI or the total return on capital, the key figure is broken down into two further key figures on which it is based, the return on sales and the turnover rate of the assets.

Return on sales

The return on sales indicates what percentage of sales remains as profit. At the same time, this provides information about the percentage by which prices can fall without falling into the red. The return on sales is calculated by dividing profit (ordinary operating result) by net sales.

Calculation formula: UR = normal operating result / turnover

Rate of turnover of assets

The turnover rate of assets (capital turnover) shows the relationship between the turnover achieved and the assets invested. The higher the turnover rate, the faster the assets turn, i.e. the lower the tied assets are in relation to sales, the better it is for the key figure, the ROI. The capital turnover is calculated by dividing the net sales by the total capital.

Equity ratio

The important rating figure equity ratio says what percentage of the total company capital or the assets come from own funds. Equity can only be changed through payments into or out of the company as well as through the profit or loss generated. It follows that the amount of equity determines the risk cushion of a company. That means how much loss a company can tolerate and still show positive equity in the balance sheet without the shareholders having to make additional payments. The higher the equity ratio, the better the assessment of this key figure.

Calculation formula: EQ = equity / total capital

Debt repayment period in years

How many years can your company pay off its debts on its own? This important rating figure provides the answer by comparing debt capital with free liquid funds per year (cash flow). A short debt repayment period is to be seen as positive, as it is due to the low level of borrowing and / or high profitability.

Cash flow

Cash flow is an important key figure for corporate management when liquidity is tight and is an indicator of the company's internal financing strength. It is also a very relevant number for your banker to assess the creditworthiness of your company. The cash flow is - simply put - nothing more than a representation of where the money in the company came from and what it was used for. There are many calculation formulas for the cash flow. In the basic structure, the cash flow is calculated as follows:

Annual surplus
+ Depreciation
- Attributions
+ Change in provisions
= Cash flow

Cash flow as a percentage of operating performance

The ratio of the cash flow from the result to the sales achieved provides information about the financial performance of the company. This amount is mainly available for investments, debt repayment and profit distribution. The cash flow as a percentage of the operating performance is an important rating indicator.

Customer target in days

The debtor target is the average term of a (customer) claim (period that elapses on average between invoicing and receipt of payment). The higher the average accounts receivable target within which your customers pay their bills, the longer it will take to get your well-earned cash in your bank account. For the duration of the accounts receivable, the comparison with the average payment terms granted by the company to customers is particularly interesting. A longer claim period than is granted to the customer indicates that either there is insufficient accounts receivable management in the company or that some of the customers have liquidity problems and do not pay on time. A lower claim period than is granted to the customer may indicate that the customer is taking advantage of the discount option or that payment terms are granted that are too long.

Calculation formula: Dz =
Customer demands x 365
sales

Accounts payable target in days

This metric indicates how long it takes on average for your suppliers to get their money. A longer vendor period than the payment term granted by the supplier can indicate that the company has some liquidity problems and cannot pay on time. If a shorter vendor period than the supplier allows, this may indicate that you are making intensive use of the discount option.

Storage time in days

The key figure shows you how many days per year purchased material or goods are in stock on average before they are further processed or shipped. A long storage period can indicate that there are many goods in the storage area that are no longer needed or that the company is only slightly dependent on suppliers for delivery options. A short storage period can indicate that the warehouse is largely outsourced to suppliers (high dependency of the company).

Calculation formula:

Storage period I:
Stock of raw materials, consumables and supplies x 365
Total assets

Storage period II:
Inventory of goods and finished products x 365
Turnover (cost of goods)

Working capital

As a rule, the entrepreneur is aware of what constitutes fixed and current assets. But are the fixed and current assets in the company optimally financed? Few entrepreneurs think about that. Resourceful American business economists have developed a yardstick for this, the so-called working capital.

calculation

To calculate the working capital, the current assets must first be determined by adding up all goods, money stocks, receivables, etc. All short-term borrowed funds such as B. the supplier liabilities or the current account credits etc. are deducted. The result is then the working capital.

Working capital greater than / equal to zero

A positive working capital, or at least one of zero, signals that the company is in financial equilibrium.

Working capital negative

A negative working capital indicates that parts of the fixed assets are financed in the short term, which is a gross violation of the golden rules of financing. Because the short-term debt then exceeds the current assets, the debt should be rescheduled as soon as possible.

As of January 5, 2021

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Despite careful data compilation, we cannot guarantee the complete accuracy of the information presented. If you have specific questions on one of the topics, we are always available for a personal conversation.