Liquidity ratio 1 (cash ratio) Liquidity ratio 1 is the ratio of cash and cash equivalents to current liabilities. Thus, the solvency of a company can be assessed. A value of 100% means that the entire short-term debt capital can be paid by the liquid assets. The target value depends on the sector, but is in the range of 10-30%.
Liquidity ratio 2 (quick ratio) For liquidity ratio 2, cash and cash equivalents and outstanding receivables are added together and set in relation to current liabilities. A value of 100% means that cash and cash equivalents and outstanding receivables cover current receivables. The target value is independent of the sector, but should be between 100-120%.
Liquidity ratio 3: (Current ratio) For liquidity ratio 3, the inventory is added to the cash and cash equivalents and the outstanding receivables. The resulting sum is then set in relation to the current liabilities. Compared to liquidity ratio 2, liquidity ratio 3 includes the inventory as a kind of safety buffer. In summary, it can be said that for liquidity ratio 3, all current assets are set in relation to current liabilities. The recommended target value is between 150-200%.
Net working capital (NUV) Net working capital is calculated by subtracting current liabilities from total current assets. Thus, a part of the current assets is used to cover the current liabilities. Should the net working capital be negative, the company would not be able to repay the current liabilities immediately. Accordingly, net working capital should always be positive.
Net working capital (NUV) = current assets – current liabilities
CF before interest and taxes This is the amount that results from the turnover minus the expenses.
CF before interest and taxes = turnover – expenses
CFBIT in % of turnover This is the cash flow before deduction of income taxes and interest as a % of turnover.
Debt to equity ratio The gearing ratio is the ratio of debt capital to equity capital.The higher the debt-equity ratio, the more debt a company has compared to equity. A high value therefore means that a company’s funds consist largely of borrowed capital and that the company is highly dependent. A maximum value of 200% is recommended for the gearing ratio.
Self-financing ratio The equity ratio is the ratio of equity to total capital. The higher this value, the more equity a company has compared to total capital. A high value stands for more security. Therefore, companies with high entrepreneurial risk should have a higher degree of self-financing. Depending on the level of entrepreneurial risk, a level of 30-70% is recommended.
Overall profitability (ROI) Overall profitability answers the question: “How profitably is the capital employed in the company working?”. The higher the overall profitability, the more efficiently the company operates. To calculate the ratio, profit and interest on borrowed capital are set in relation to total capital. Ideally, the target value should be greater than the interest on the debt capital employed; 10-15% is usual.
Return on equity (ROE) The return on equity shows the profitability of the equity capital employed. It results from the ratio of profit to equity. The higher the ratio, the more positive the assessment of the company. The target value should be greater than the capital market interest rate for long-term investments. The ratio is highly sector-dependent and should be analysed year-on-year with an unchanged calculation method. Return on equity is of great importance, especially for investors. This is because the return on equity enables investors to see what return they are receiving on the capital they have invested.
