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Benchmarking your business

Date post: 21-Apr-2017
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Benchmarking Your Business
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Page 1: Benchmarking your business

Benchmarking Your Business

Page 5: Benchmarking your business

Liquidity Ratios, continued

Current ratio indicates the extent to which current assets are available to satisfy current liabilities.

Usually stated in terms of absolute values (i.e., 2.5 to 1.0 or simply 2.5)

Computed as: current assets / current liabilities

Page 6: Benchmarking your business

Liquidity Ratios, continued

Quick ratio indicates the extent to which the more liquid assets are available to satisfy current liabilities. Usually stated in terms of absolute values.

A quick ratio of 1.0 generally is considered a liquid position.

Computed as: (Cash and cash equivalents + short term investments + net trade receivables) / current liabilities

Page 7: Benchmarking your business

Liquidity Ratios, continued

Days of cash indicates the number of days of revenue in cash. Generally 7 days is considered adequate.

Computed as:(Cash and cash equivalents) * 360 / expenses - depreciation

Page 8: Benchmarking your business

Liquidity Ratios, continued

Working capital turnover indicates the amount of revenue being supported by each $1 of net working capital.

A ratio exceeding 30 may indicate a need for increased working capital to support future revenue growth

Computed as: Revenue / working capital

Page 9: Benchmarking your business

Profitability Ratios

Profitability ratios are used to assist in evaluating management performance.

Page 10: Benchmarking your business

Profitability Ratios, continued

Return on assets indicates the profit generated by the total assets employed. A higher ratio reflects a more effective employment of company assets.

This ratio is generally presented in terms of percentages.

Computed as: Net earnings / total assets

Page 11: Benchmarking your business

Profitability Ratios, continued

Return on equity indicates the profit generated by the net assets employed. This ratio reflects the stockholders’ return on investment as a percentage.

Computed as: Net earnings / total net worth

Page 12: Benchmarking your business

Profitability Ratios, continued

Times interest earned is a reflection of a company’s ability to meet interest expense from operations. It’s an overall indicator of leverage balance.

Computed as: Net EBIT / interest expense

Page 13: Benchmarking your business

Leverage Ratios

Leverage ratios are key measurements in determining the company’s vulnerability to business downturns, as well as the capacity for credit and internal capital needs.

These ratios consider various relationships between stockholders and creditors, owners’ investment in fixed assets, and others.

Page 14: Benchmarking your business

Leverage Ratios, continued

Debt to equity indicates the relationship between creditors and owners. This relationship varies on type of industry or specialty.

Computed as: Total liabilities / total net worth

Page 15: Benchmarking your business

Leverage Ratios, continued

Revenue to equity indicates the level of revenue being supported by each dollar of equity.

Computed as: revenue / total net worth

Page 16: Benchmarking your business

Leverage Ratios, continued

Asset turnover measures the level of revenue being supported by each dollar of assets. This is a good measurement for the effectiveness of asset expansion.

Computed as: Revenue / total assets

Page 17: Benchmarking your business

Leverage Ratios, continued

Fixed asset ratio measures the level of stockholders’ equity invested in net fixed assets. Be sure to consider the effect of off-balance sheet financing.

Computed as: Net fixed assets / total net worth

Page 18: Benchmarking your business

Leverage Ratios, continued

Underbillings to equity indicates the level of unbilled contract volume being financed by the stockholders. Generally a ratio of 30% or less is the target.

Computed as: (Unbilled work + costs in excess) / total net worth

Page 19: Benchmarking your business

Leverage Ratios, continued

Backlog to equity indicates the relationship of signed or committed work to total stockholders’ equity. High ratios may indicated the need for additional permanent capital.

Computed as: Backlog / total net worth

Page 20: Benchmarking your business

Efficiency Ratios

Efficiency ratios are measurements of the effectiveness of utilizing current assets and managing current liabilities.

Page 21: Benchmarking your business

Efficiency Ratios, continued

Backlog to working capital indicates the relationship between committed work and working capital. High ratios may indicate the need for additional permanent working capital.

Computed as: Backlog / working capital

Page 22: Benchmarking your business

Efficiency Ratios, continued

Months in backlog measures the number of months needed to complete all committed work.

Computed as: Backlog / (1/12 of revenue)

Page 23: Benchmarking your business

Efficiency Ratios, continued

• Days in a/r• Days in a/p• Days in inventory

All indicate the number of days to liquidate.

Computed as: ((Net a/r - retainage) * 360) / revenue(Accounts payable – retainage) * 360 / total costInventory * 360 / cost of sales

Page 24: Benchmarking your business

Efficiency Ratios, continued

Operating cycle indicates the length of time for the company to complete a normal operating cycle. A low ratio may indicate a need for more working capital.

Computed as: Days in cash + days in A/R + days in inventory – days in A/P

Page 25: Benchmarking your business

Others

• Gross profit• Interest as a percentage of gross profit• Coverage ratios

Page 26: Benchmarking your business

Now what?

• Understand the limitations of industry comparisons.

• Understand the importance of historical comparisons.

• Build a list of key performance indicators for your company and build goals around improvement.

• Work with your users to determine what’s important to them.


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