Definition: Key figures are used to analyse a company's affairs and conditions.

When analysing the financial situation of a company at the end of the accounting year, it's important to keep in mind what type of company you're dealing with. By focusing on this, you can compare the final result with other companies of the same type, which will make it easier to evaluate whether it has been a good or bad accounting year for the company.

If the company has operated for several continuous accounting years, you can compare these years in order to establish a positive or a negative development.

Many useful key figures exist, and in the following, some of the most important ones will be explained:

Return on capital employed and return on equity

The return on capital employed calculates whether the company profits from the capital employed, while the return on equity measures how much interest the capital employed carries.

If the return on equity is less than the return on capital employed, the company loses on its loan capital – and if the return on equity is greater than the return on capital employed, the company profits from its loan capital.

Profit margin

The profit margin is calculated by finding the profit as a percentage of the revenues in a company. It shows how good a company is at adjusting its costs to its income.

A large profit margin shows that the company is good at keeping its costs at a minimum, resulting in higher profits.

Contribution margin

The contribution margin measures how much is left of the revenues to cover the fixed costs. If the contribution margin is high, the company has had only few variable costs, and vice versa, if the margin is low, the company has had many variable costs.

A change in the contribution margin can also be caused by a change in the sales price or a change in how the product is produced.

Customers' and suppliers' turnover ratio

The customers' turnover ratio measures how fast customers pay their invoices. If the customers' turnover ratio is high, they pay their invoices fast, i.e. they have a shot credit period.

The suppliers' turnover ratio tells how long a credit period is offered to the company by its suppliers. The lower the suppliers' turnover ratio, the longer the company can keep its money inside the company.

Solvency ratio and break-even sales

The solvency ratio shows a company's ability to bear a loss. It measures the percentage of the capital that a company can lose before its loan capital is affected.With a high solvency ratio, the company is able to bear large losses without getting into financial problems.

Break-even sales is the minimum income that a company needs to earn during a year in order to achieve a zero profit result.

Formulas

The formulas for the most important key figures are listed in the following:

Return on capital employed: Return before tax and financing charges/net assets (capital employed)*100

Return on equity: Return after tax and financing charges/equity*100

Profit margin: Return before tax and financing charges/revenue*100

Contribution margin: Contribution margin/revenue*100

Customers' turnover ratio: 360/(Revenue/customers) = number of days

Suppliers' turnover ratio: 360/(Purchased products/suppliers) = number of days

Solvency ratio: Equity/total assets*100

Break-even sales: Capacity costs/contribution ratio*100

Please contact your accountant, for further information on key figures. We also refer you to our help function e-copedia, where you can find out how to calculate key figures in e-conomic.