🔍 What is financial health?
Financial health refers to a company’s overall ability to maintain and improve its economic position over the long term.
Evaluating financial health involves analyzing key performance indicators (KPIs) that provide insights into different aspects of business performance.
📊 Financial Health Indicators
1. Profitability
🔍 What is it?
Shows how effectively a company converts its revenue into profits.
📌 Key KPIs
Net profit margin
Return on invested capital (ROIC)
🎯 Goal
A positive and growing margin reflects sustainable and profitable operations.
2. Liquidity
🔍 What is it?
Measures the company’s ability to cover short-term obligations using liquid assets.
📌 Key KPIs
Current ratio
Quick ratio (acid-test ratio)
🎯 Goal
Maintain a sufficient level to ensure immediate solvency without compromising operational efficiency.
3. Leverage
🔍 What is it?
Analyzes the use of debt to finance company operations and its ability to cover related costs.
📌 Key KPIs
Debt-to-equity ratio
Interest coverage ratio
🎯 Goal
Achieve a balance between leveraging debt for growth and keeping financial risk under control.
4. Efficiency
🔍 What is it?
Examines how the company manages its resources to maximize production or sales.
📌 Key KPIs
Inventory turnover
Asset turnover
🎯 Goal
Optimize processes to generate more revenue with the same resources.
💡 Why is this important?
Analyzing financial health enables companies to make more informed strategic decisions, identify risks in advance, and demonstrate financial strength to investors, partners, and financial institutions.