Demystifying ratios: 6 key ratios to include as your KPI | RSM Kenya

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“Oh no maths! “~ you might think… but ratios are a big help in making sense of the financial numbers that you have and show a comparable indicator to enable you to make key decisions. The below are six key ratios you should include as your key performance indicator (KPI).

By Palak Tewary

Net profit margin ratio

Calculated as:

Net Profit                           X 100%
Turnover (Sales)

The profit margin ratio shows how efficient a company is at controlling costs as a percentage. A higher net profit margin indicates that the company is better at converting its turnover to actual profit. This ratio helps to make comparison with the industry standard and benchmark against other companies in the same industry to evaluate performance.

Debt to equity ratio

Calculated as:

Total Debt (long and short-term)
Shareholder’s Equity

Debt is money borrowed by the company to run their operations. Shareholder’s equity refers to the money put in by the shareholders into the business. This ratio shows how the two are balanced. Generally, a high debt to equity ratio is not desired however also consider both the industry-wide trend and the company specific requirements.

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