Financial Ratios - The Strategic CFO® (2024)

FAQs

What ratios does CFO look at? ›

The most important financial ratios in business include liquidity, debt, capital, and risk ratios. These ratios measure the strength of a company's financial position, enabling you to make strategic decisions based on their outcome.

It is calculated by dividing the cash flows from the company's operations by its current liabilities. Cash flow from operations involves cash from the company's prime business operations. Cash Flow to Debt Ratio=Cash Flow from Operations/ Total Outstanding Debt.

This ratio is otherwise known as quality of earnings ratio. It is computed by dividing CFO by Profit After Tax (PAT or Net Income) of a firm. If CFO exceeds the net income, then it is considered the firm can convert its accounting (accrual) earnings into cash. Else, the firm has poor cash flow management practices.

The two metrics a CFO should always monitor depends on their industry. However, two really important metrics for the CFO are the Return on Investment (ROI) and Operating Cash Flow. ROI measures the profitability of investments and is crucial for assessing the efficiency of spending.

CFO Equity: How Much Equity Could a CFO Expect? Typically, CFOs might expect to receive between . 1% and 3% of a company's value. In some cases, it may be much more, depending on the stage at which the CFO joins the executive leadership or founders.

5 Essential Financial Ratios for Every Business. The common financial ratios every business should track are 1) liquidity ratios 2) leverage ratios 3)efficiency ratio 4) profitability ratios and 5) market value ratios.

Operating cash flow margin is a cash flow ratio that measures cash from operating activities as a percentage of total sales revenue in a given period. Like operating margin, it is a trusted metric of a company's profitability and efficiency and its earnings quality.

Cash flow from operating activities (CFO) indicates the amount of money a company brings in from its ongoing, regular business activities, such as manufacturing and selling goods or providing a service to customers. It is the first section depicted on a company's cash flow statement.

How should a CFO be measured? ›

The biggest indicator of a great CFO is the ability to drive financial strategy and deliver sustainable growth. Metrics like team leadership and risk management are important too, but the most essential success metrics of a CFO is, undoubtedly, a business' financial health.

Here's the formula to calculate a company's net CFO using the indirect method: Net cash from operating activities = Net income +/− depreciation and amortization +/− Change in working capital.

Cash flow from operations (CFO): The CFO metric is calculated in the first section of the company's cash flow statement.

Most CFOs like to keep an eye on the amount of working capital their company has, as this represents how much they have at their disposal for expansion. This CFO metric is best used in conjunction with the operating cash flow KPI when considering aggressive growth opportunities.

The cash flow-to-debt ratio compares a company's generated cash flow from operations to its total debt. The cash flow-to-debt ratio indicates how much time it would take a company to pay off all of its debt if it used all of its operating cash flow for debt repayment (although this is a very unrealistic scenario).

The cash flow to sales ratio, also known as the operating cash flow to sales ratio or OCF/sales ratio, shows a business's current cash flow after all capital expenditures related to sales costs have been subtracted. Essentially, it analyzes operating cash flow against current sales revenue.

The CFO helps with shaping portfolio strategies, undertaking major investment and financing decisions, and communicating with key stakeholders—all while leading a multitalented and technologically savvy finance team. Communication is a key part of the role, both with investors and boards.