Whether you're an MBA student specializing in finance or simply want to understand how CFOs measure business performance, learning the Top 10 CFO KPIs (Key Performance Indicators) is a must. These financial metrics help assess the health, profitability, efficiency, and liquidity of any business. Let’s dive into the top CFO KPIs with real-world examples to help you grasp each concept.
1️⃣ Return on Investment (ROI)
Definition: ROI measures how much profit you generate from an investment.
Formula:
ROI = (Income from Investment / Cost of Investment)
Example:
If a company invests ₹1,00,000 in a marketing campaign and earns ₹1,50,000 in revenue, the ROI is:
ROI = ₹50,000 / ₹1,00,000 = 0.5 or 50%
This means the investment generated a 50% return.
2️⃣ Return on Equity (ROE)
Definition: ROE evaluates how effectively a company is using shareholders' equity to generate profit.
Formula:
ROE = Net Income / Shareholders’ Equity
Example:
If the net income is ₹10 lakhs and the equity is ₹50 lakhs, then:
ROE = ₹10,00,000 / ₹50,00,000 = 20%
The company generates ₹0.20 profit for every ₹1 of shareholder equity.
3️⃣ Working Capital Ratio
Definition: This ratio assesses a firm’s ability to meet short-term obligations.
Formula:
Working Capital Ratio = Current Assets / Current Liabilities
Example:
If current assets = ₹5,00,000 and liabilities = ₹3,00,000
Working Capital Ratio = 5,00,000 / 3,00,000 = 1.67
This suggests good short-term financial health.
4️⃣ Debt-to-Equity Ratio
Definition: Indicates how much debt a company uses to finance its assets relative to equity.
Formula:
Debt-to-Equity = Total Debt / Total Equity
Example:
If total debt = ₹40 lakhs and total equity = ₹20 lakhs
Debt-to-Equity = 40 / 20 = 2.0
This means the company uses ₹2 of debt for every ₹1 of equity—considered risky.
5️⃣ Earnings per Share (EPS)
Definition: Measures profitability for each outstanding share.
Formula:
EPS = Net Income / Average Outstanding Shares
Example:
Net income = ₹20 lakhs, outstanding shares = 10 lakhs
EPS = 20 / 10 = ₹2 per share
This helps investors assess company value.
6️⃣ Net Profit Margin
Definition: Shows what percentage of revenue turns into profit after all expenses.
Formula:
Net Profit Margin = Net Income / Revenue
Example:
Net income = ₹1,00,000; Revenue = ₹5,00,000
Margin = 1,00,000 / 5,00,000 = 20%
This means 20% of revenue remains as profit.
7️⃣ Return on Assets (ROA)
Definition: Indicates how effectively a firm uses its assets to earn profit.
Formula:
ROA = Net Income / Total Assets
Example:
Net income = ₹8 lakhs; Assets = ₹40 lakhs
ROA = 8 / 40 = 20%
Every ₹1 of asset generates ₹0.20 profit.
8️⃣ Inventory Turnover
Definition: Shows how many times inventory is sold and replaced in a period.
Formula:
Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory
Example:
COGS = ₹6 lakhs, Average inventory = ₹2 lakhs
Turnover = 6 / 2 = 3 times per year
Higher turnover = efficient inventory management.
9️⃣ Quick Ratio (Acid-Test Ratio)
Definition: Measures the ability to meet short-term obligations with liquid assets.
Formula:
Quick Ratio = (Current Assets - Inventories) / Current Liabilities
Example:
Current Assets = ₹4,00,000, Inventory = ₹1,00,000, Liabilities = ₹2,00,000
Quick Ratio = (4,00,000 - 1,00,000) / 2,00,000 = 1.5
The company has ₹1.50 in quick assets per ₹1 of liability.
🔟 Current Ratio
Definition: Another liquidity metric that includes all current assets.
Formula:
Current Ratio = Current Assets / Current Liabilities
Example:
If current assets = ₹3 lakhs and current liabilities = ₹1.5 lakhs
Current Ratio = 3 / 1.5 = 2.0
This is considered financially healthy.
CFO KPIs Cheat Sheet for Students
| KPI Name | Definition | Formula | Example |
|---|---|---|---|
| 1. ROI (Return on Investment) | Profit generated from an investment | Income from Investment / Cost of Investment | ₹50,000 profit on ₹1,00,000 investment → ROI = 50,000 / 1,00,000 = 50% |
| 2. ROE (Return on Equity) | Return on shareholders’ equity | Net Income / Shareholders’ Equity | ₹10 lakh income on ₹50 lakh equity → ROE = 10 / 50 = 20% |
| 3. Working Capital Ratio | Ability to meet short-term obligations | Current Assets / Current Liabilities | ₹5L assets, ₹3L liabilities → 5 / 3 = 1.67 |
| 4. Debt-to-Equity Ratio | Debt proportion in company financing | Total Debt / Total Equity | ₹40L debt, ₹20L equity → 40 / 20 = 2.0 (Risky) |
| 5. EPS (Earnings per Share) | Profit per outstanding share | Net Income / Avg. Outstanding Shares | ₹20L income, 10L shares → EPS = 20 / 10 = ₹2 per share |
| 6. Net Profit Margin | Profit as a % of revenue | Net Income / Revenue | ₹1L income on ₹5L revenue → 1 / 5 = 20% margin |
| 7. ROA (Return on Assets) | Profit from total assets | Net Income / Total Assets | ₹8L income, ₹40L assets → 8 / 40 = 20% |
| 8. Inventory Turnover | How often inventory is sold | COGS / Avg. Inventory | ₹6L COGS, ₹2L inventory → 6 / 2 = 3 times/year |
| 9. Quick Ratio | Immediate liquidity (excludes inventory) | (Current Assets - Inventory) / Current Liabilities | ₹4L assets, ₹1L inventory, ₹2L liabilities → (4-1)/2 = 1.5 |
| 10. Current Ratio | Liquidity including all current assets | Current Assets / Current Liabilities | ₹3L assets, ₹1.5L liabilities → 3 / 1.5 = 2.0 |
Quick Tips to Remember:
- Profitability KPIs: ROI, ROE, EPS, Net Profit Margin, ROA
- Liquidity KPIs: Current Ratio, Quick Ratio, Working Capital Ratio
- Efficiency KPI: Inventory Turnover
- Risk KPI: Debt-to-Equity Ratio
Conclusion
As an MBA student, understanding these 10 CFO KPIs is essential for decoding financial performance and strategic planning. These metrics provide a holistic view of a company's financial health—from profitability and efficiency to liquidity and risk. Mastering them will prepare you for roles in finance, consulting, and strategy.
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