Financial indicators: how to tell if a company is doing well

Financial indicators are metrics that measure the efficiency and evolution of a company. Their results influence the decisions made in the company, so they play a fundamental role in the evolution of the business. 

What are financial indicators? 

Financial indicators, also referred to as financial ratios, are tools to analyse the state of a company. In this way, it is possible to know whether the management of the company is being good or bad, as well as in which departments or areas of the company it is being correct or incorrect.

A financial indicator is a metric. It is a verifiable data that can be qualitative or quantitative, and which is obtained through a proportion, ratio or quotient of values of two concepts.

As explained by the financial director of Edenred, financial indicators They measure the efficiency of the company and are always very useful to see its evolution and support the decisions that are taken. It should also be borne in mind that there are different financial indicators that provide specific and differentiated information about the company. Therefore, depending on the information we want to know, it will be interesting to use one type or another. 

How to measure the efficiency of your company?

Although there are many financial indicators or ratios that can be used, there are four that are indispensable in any company.

1. Own fundsThey indicate the theoretical value of the company for the shareholder. If these funds are below half of the company's share capital, the company would be in danger of dissolution.
2. The Immediate Liquidity Test (or Acid Test)The indicator that reflects the company's ability to meet its short-term debts. It is calculated by comparing the most liquid assets with current liabilities (short-term debts). Its value should be close to 1.
3. The capacity to generate cashThis is an indicator that is extremely important today. The business objective must be to generate sufficient liquid means to meet its payment obligations. This indicator is always linked to a correct cost structure in order to adapt to fluctuations in demand.
4. Debt indicatorsThe level of indebtedness indicates the proportion in which creditors participate in the total value of the company. It serves to identify the appropriateness of the level of indebtedness presented. High debt ratios are only acceptable if the rate of return on total assets is higher than the average cost of financing. In addition, the level of indebtedness should also be compared with competitors (companies operating in the same sector and in a similar situation).

How to analyse financial indicators

In order to analyse the financial ratios or indicators, it is necessary to have a team that knows how to interpret the indicators correctly. Moreover, this team must be able to renew them in the event that the company's reality changes, or in the event that future market developments lead to different conclusions. 

The professional profile must be a person who is used to working with data and who loves rigour. Above all, it must be a person with an open mind who does not rule out any scenario, however remote it may seem.
In the current economic climate, cost management and control is indispensable in any organisation. In fact, the company's ability to adapt to the different economic times depends to a large extent on its control. For this reason, it is essential so that it does not become oversized and end up disappearing because it does not have a flexible cost structure. In other words, it is a key element in ensuring the survival and continuity of the company., It is therefore important to allocate the necessary resources to their implementation and consolidation.