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What is a Key Figure?

Definition: Key figures are calculated for the analysis of a company's accounting year.
When analysing the accounting year, it's important to consider what type of company you're dealing with. By keeping this in mind, the final result can be compared with other companies of the same type – this will make it easier to see whether the accounting year has been good or bad to the company.

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

Many different key figures exist, and all are useful for analysing developments. In the following, some of the most important key figures will be explained:

Return on capital employed and return on equity

The rate of return on capital employed measures whether the company is able to profit from the capital contributed, while the return on equity tells how much interest the capital contributed carries.

If the return on equity is less than the return on capital employed, the company is losing on its loan capital – and vice versa, if the return on equity is greater than the return on capital employed, the company profits from its loan capital compared to the cost of it.

Profit margin

The profit margin expresses how large a percentage profits comprise of the revenues in a company. It shows how good a company is at adjusting its costs to its income.

The larger the profit margin, the better the company is at keeping its costs at a minimum resulting in higher profits.

Contribution ratio

The contribution ratio shows how much is left of the company's revenues to cover the fixed costs. If the contribution ratio is high, the company hasn't had many variable costs, and accordingly, if it's low, the company has had many variable costs.

A change in the contribution ratio may also owe to a change in the sales price or a change in the production of the product.

Customers' and suppliers' turnover ratio

The customers' turnover ratio measures how fast customers pay their amounts due. If the turnover ratio is high, the customers pay their invoices fast, i.e. their credit period is short.

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

Solvency ratio and break-even sales

The solvency ratio expresses a company's ability to bear a loss. It calculates how large a percentage of the capital the company can lose before the loan capital is affected. A high solvency ratio means that the company is able to bear large losses without encountering financial problems.

Break-even sales is the minimum income needed during the year to achieve a zero profit result.

Formulas

The formulas for the most important key figures look as follows:

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 ratio: 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

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

 

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