Key Financial Performance Indicators: 15 Ways to Measure Business Performance and Success

There isn’t one fixed way to measure a business’s performance. Instead, most professionals evaluate a variety of financial metrics to get a sense of how the different parts of a business are performaing and how they work together.

Many of these metrics are known as key performance indicators or KPIs. You can think of them like pieces of a larger puzzle. Alone, they tell a small part of a company’s story, but when you put them all together, you’re able to uncover much deeper insights about a businesses overall financial health and outlook.

Understanding how to effectively measure and monitor financial performance is a key step towards making smarter financial decisions. This article explores examples of common financial metrics and how companies can effectively implement financial performance monitoring to maximize success.

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Table of contents
Understanding Key Financial Performance Indicators Profitability Metrics Liquidity and Efficiency Metrics Solvency and Leverage Metrics Growth and Valuation Metrics Customer-Centric Metrics How to Track Finance KPIs Measure and improve your KPIs

Understanding Key Financial Performance Indicators

Key Financial Performance Indicators are finance metrics used to measure and track a company’s financial health over time. This information provides a clear and concise overview of different parts of a company’s financial operations, such as profitability, liquidity, efficiency, and growth. Examples of finance KPIs include gross profit margin, operating cash flow, and debt-to-equity ratio, among many others, which we’ll explore in greater detail in the following sections.

First, let’s take a moment to establish why these metrics matter. Typically, business leaders use KPIs to evaluate performance, identify issues, and determine areas for improvement. For example, tracking profitability KPIs like gross and net profit margins can reveal the efficiency and sustainability of a business, while liquidity KPIs such as the current ratio help assess a company's ability to meet short-term financial obligations. By leveraging this information effectively, leadership teams can track progress towards specific goals, pinpoint problem areas, set targets, and strategize for the future.

Finance metrics are also useful for external stakeholders seeking to assess a company’s financial health. These standardized tools help investors compare the company’s performance with others in its industry and evaluate how its performance has changed over a given period of time. As an example, a startup may experience negative cash flow in the early years of operation as it invests heavily in its business model. Investors would likely expect cash flow to improve over time as the company’s business model matures.

In the next section, we’ll explore 15 key financial performance indicators commonly used to evaluate a business’s performance and success. By tracking these metrics, you’ll be able to set yourself on the path to smarter investments and strategic business success.

PRO TIP
Consider using automated KPI reporting to make the compilation and reporting of KPIs easy to complete and available each month for review. Enterprise Resource Planning (ERP) and Financial Planning and Analysis software will often have this capability.

Profitability Metrics

First, let’s explore profitability KPIs. These metrics help us understand how effectively a business generates profit by focusing on various aspects of its operations, such as production efficiency, operational profitability, and a company’s overall financial health.

1. Gross Profit Margin

Gross profit margin determines the percentage of revenue retained after accounting for the direct costs associated with producing goods and delivering services. It’s used to explore a company’s production efficiency and determine whether its production costs and pricing strategies are optimized for success.

To calculate gross profit margin, you’ll subtract the cost of goods sold (COGS) from the total revenue, then divide the result by total revenue. As an example, if a company generates $100,000 in revenue and incurs $60,000 in direct costs, its gross profit would be $40,000, resulting in a gross profit margin of 40%.

Generally, companies will want to achieve a higher gross profit margin as this will generate more cash. With more capital on hand, they’ll be better prepared to cover expenses, pay off debts, and reinvest in their business model. A lower gross profit margin might indicate that production costs are too high or that pricing strategies need to be reevaluated.

2. Net Profit Margin

Net profit margin shows how much revenue remains as profit after accounting for all expenses, including cost of goods sold, operating costs, interest, and taxes. By including all costs, it evaluates a company’s financial stability and profitability by focusing on its overall financial health.

This metric is calculated by dividing net profit by total revenue. For example, if a company has a net income of $100,000 and revenue of $1,000,000, its net profit margin would be 10%, meaning that it retains 10% of its revenue as profit after accounting for all expenses.

EXPERT TIP
By focusing on production costs, gross margin highlights how well a company manages its direct costs and pricing strategies. Net margin examines a company’s overall financial health and its ability to sustain profitability over time.

3. EBITDA

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is designed to give a clearer picture of a company’s operational profitability and cash flow potential by excluding non-operating expenses and other accounting practices. It’s calculated by adding interest, taxes, depreciation, and amortization to a company’s net income.

By setting aside the effects of financing decisions, tax environments, and accounting methods—factors which may be outside of a company’s control—this metric helps us understand the financial performance of its core operations. As a result, it’s frequently used to compare the status of companies across different regions and industries.

That said, EBITDA isn’t currently recognized under Generally Accepted Accounting Principles (GAAP) and many critics feel that it overstates a company’s profitability by excluding important expenses. Like any financial metric, it’s best to evaluate its impact alongside other financial and non-financial metrics.

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Liquidity and Efficiency Metrics

Profitability metrics focus on a company’s ability to generate revenue over the long term. However, it’s also important to take short-term financial health and operational effectiveness into consideration when evaluating business performance. These are the key factors measured by liquidity and efficiency metrics, which we’ll explore in greater detail in this section.

4. Operating Cash Flow

Operating cash flow determines how much cash a company is able to generate from its core operations. It’s a helpful tool for understanding a company’s liquidity, providing key insights into its ability to maintain and grow its operations, pay dividends, and repay debts without external financing.

There are two different methods for calculating operating cash flow: the direct and indirect method. The indirect method is more commonly used, so we’ll use it in our example. It starts with a company’s net income, then adjusts for non-cash items and changes in working capital.

For instance, let’s consider a company with a net income of $750,000 and a depreciation expense of $200,000. Subtracting changes in inventory and accounts receivable at $150,000 each, we’d reach an operating cash flow of $650,000. In other words, this company generated $650,000 from its core operations during the period in question, which it can use to fund growth or reduce debt.

5. Working Capital

While operating cash flow is a more dynamic measure of a company’s short-term liquidity, working capital gives you a snapshot of a company’s liquidity at a specific point in time. By measuring the difference between a company’s current assets and current liabilities, this metric gives a sense of whether a company is able to meet its day-to-day obligations at the moment in question.

For example, let’s imagine a company with $120,000 in current assets and $70,000 in current liabilities. It would have $50,000 on hand to cover inventory costs, payroll expenses, loan obligations, and other short-term expenses.

A positive working capital is essential for maintaining day-to-day operations and ensuring enough resources are available for growth. A low or negative value would suggest liquidity issues, though as always, you’ll want to consider the industry-specific context when evaluating this metric.

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6. Current Ratio

Another way to use current assets and liabilities to understand a company’s short-term liquidity is the current ratio. This metric is calculated by dividing current assets by current liabilities.

So, if we return to the previous example, a company with $120,000 in current assets and $70,000 in current liabilities would have a current ratio of 1.7. Generally, a value between 1.5 and 3.0 is considered healthy, though this can vary depending on the industry in question.¹

While working capital is a dollar amount demonstrating the absolute difference between these metrics, the current ratio expresses them as a proportion. This makes it especially useful for comparing the financial status of different companies, since different amounts of working capital will be necessary depending on the industry in question.

7. Inventory Turnover Ratio

To stay liquid, a company will need to be able to turnover its inventory effectively. Selling products quickly and efficiently leads to faster cash inflows, and it also helps companies avoid tying up extra capital in inventory, freeing them to invest in other operational needs.

The inventory turnover ratio shows how many times inventory is sold and replaced over a specific time period. Generally speaking, a higher inventory turnover ratio means a company is better at managing its inventory. A lower value may suggest that a company needs to improve its operational efficiency or purchasing strategies.

This metric is calculated by dividing the average inventory from the cost of goods sold (COGS). For example, a company with COGS of $500,000 and an average inventory value of $60,000 would have an inventory turnover ratio of 8.33. That would mean that the company’s inventory turned over 8.33 times during the year.

8. Total Asset Turnover

Total Asset Turnover shows how efficiently a company uses its assets to generate sales. This ratio is calculated by dividing the average total assets by the net sales.

So, if a company has net sales of $1,000,000 and average total assets of $500,000, its total asset turnover would be 2. In other words, the company generates $2 in sales for every $1 invested in assets.

Of course, a higher ratio usually means a company is using its assets more effectively since it’s bringing in more sales than it’s investing in its assets. Usually, that also means that a company is better prepared to meet its short-term obligations.

That said, some sectors require more assets to generate sales than others. Capital-intensive industries like steel, utilities, oil, and gas require significant investments in infrastructure and equipment, leading to higher costs.

Solvency and Leverage Metrics

Next, let’s consider some metrics designed to measure a company’s long-term financial health. Solvency metrics examine whether a company will be able to meet its long-term obligations. This information is especially useful for creditors and investors, since it gives a sense of whether a company will be able to manage its debt effectively or whether it’s at risk of defaulting.

9. Debt-to-Equity Ratio

The debt-to-equity ratio compares a company’s total debt to its total shareholder equity. In simple terms, it shows how much a company is financing its operations through debt versus wholly-owned funds.

To calculate this metric, you’ll divide the company’s total liabilities by its shareholder equity. In other words, a company with $100,000 in total debt and $50,000 in shareholder equity would have a debt-to-equity ratio of 2:1 or 2:0.

This ratio matters because it gives stakeholders a sense of a company’s leverage and risk. A higher debt-to-equity ratio indicates that a company has been more aggressive in financing its growth with debt, while a lower ratio means it’s been more conservative by relying on equity.

10. Return on Equity (ROE)

Return on Equity compares a company’s profitability with its total shareholder equity. In other words, it shows how efficiently a company generates profit from its shareholders’ investments.

Naturally, many investors rely on ROE to compare companies within a particular industry. A consistently high ROE indicates that company leadership effectively manages its resources, which can attract more opportunities to invest and raise capital.

This metric is calculated by dividing the average shareholders' equity from the net income, and it’s typically expressed as a percentage. For example, an ROE of 25% means that for every dollar of shareholder equity, the company generates 25 cents in profit.

11. Return on Assets (ROA)

ROA looks at how efficiently a company generates profit from its assets. It’s also expressed as a percentage, though it’s calculated by dividing average total assets from net income.

A higher ROA suggests that a company is better at managing its assets in an efficient manner. Many investors also use it to compare performance across an industry, and it’s also likely to be lower in more capital-intensive sectors like telecommunications and utilities.

Growth and Valuation Metrics

While profitability, solvency, and liquidity metrics are important for assessing a company’s current or past performance, there are times where you’ll want to get a better sense of its future prospects and potential returns. In these instances, growth and valuation metrics are especially useful, since they’re geared towards a company’s potential for future success and its overall worth in the market.

12. Revenue Growth Rate

The revenue growth rate measures the percentage increase in a company’s sales or income over a specific period of time. Usually, it’s used to compare the performance with its output over the same period in the previous year. For example, if a company’s revenue grew from $1 million in 2024 to $1.2 million in 2025, its year-over-year growth rate would be 20%.

Revenue growth rate is used to evaluate a company’s market performance. A positive growth rate, such as the one used in our example, indicates expansion and success. However, a negative growth rate might mean a company is experiencing challenges.

13. Earnings Per Share (EPS)

EPS shows a company’s profitability on a per-share basis. Starting with the net income, it’s calculated by subtracting the value from preferred dividends, and then dividing by the weighted average common shares outstanding.

This metric is especially useful for investors, since it indicates the portion of a company’s profit that’s allocated to each outstanding share. Of course, a higher EPS value is usually preferred, since it usually indicates higher profitability and a higher stock price.

Customer-Centric Metrics

A company’s long-term financial health also depends on the long-term value of its customers. Certain KPIs allow businesses to measure and improve on their customer-focused strategies. By providing valuable insights into customer behavior and profitability, companies can make data-driven decisions to enhance customer experience and drive long-term business growth.

14. Customer Acquisition Cost

Most companies want to be able to bring in new customers at a low cost in order to maximize their profitability. If you’re looking to determine whether sales and marketing efforts are effective at driving value for your company, you’ll want to look at Customer Acquisition Cost (CAC).

This metric is calculated by dividing total sales and marketing expenses by the number of new customers acquired. As an example, let’s consider a company that spent $100,000 on sales and marketing in a quarter and onboarded 500 new customers. The CAC would be $200 per customer.

Of course, the ideal CAC will vary, as some industries require more sales and marketing spend from the jump. Still, companies can look to improve their CAC by optimizing marketing strategies, developing more targeted campaigns, and working to enhance conversions through existing channels.

15. Customer Lifetime Value

Onboarding a new customer is only the first step. Companies can use customer lifetime value (LTV) to measure the profitability of a typical customer over the long term. This metric determines how much revenue a business expects to bring in from a customer over the course of their relationship.

To calculate LTV, you’ll start with customer value, which is calculated by multiplying average purchase value and average purchase frequency. From there, you’ll multiply that by the average number of years a customer remains active.

This metric encourages businesses to balance the cost of acquiring new customers against their potential long-term value. It considers the long-term relationship, rather than looking solely at individual transactions. Businesses might use it to assist with retention and make more informed decisions about sales and marketing strategies.

How to Track Finance KPIs

Now that we’ve explored some key financial performance indicators, let’s take a look at how companies can effectively implement financial performance monitoring to capitalize on opportunities for growth and improvement throughout their organization.

To start, you’ll consider which KPIs are most relevant for your specific business. Once the appropriate metrics are selected, you’ll want to take a systematic approach to ensure accuracy, consistency, and timely reporting. You can use financial software or business intelligence tools to automate data collection and calculation, saving valuable time while also reducing the risk of human error throughout the reporting process.

From there, it’s worth establishing clear benchmarks and targets for each metric you plan to track. Regularly analyze the data, identify trends, and address issues proactively. By regularly communicating the insights gathered from this information, you can encourage smarter decision-making and data-driven strategy adjustments.

Of course, companies should regularly review their chosen finance KPIs to ensure they’re aligned with business goals and industry standards. It’s also worth noting that financial metrics aren’t the only consideration to take in mind when evaluating a company’s performance. Non-financial metrics and KPIs help give businesses a well-rounded look at their overall position in the marketplace.

Measure and improve your KPIs

Implementing an effective strategy for tracking finance KPIs helps businesses make informed decisions, identify areas for improvement, and set themselves up for long-term growth.

By providing data-driven insights into a company’s financial status, these metrics allow for comparison against benchmarks, industry standards, and historical performance. Businesses can use them to set realistic goals, track progress over time, and identify issues before it’s too late.

While the most important KPIs vary by industry and size, most companies will want to keep an eye on gross profit margin, net profit margin, and operating cash flow. By identifying the most relevant metrics to your company and tracking them over time, you can work towards maintaining a strong position in the marketplace and achieving success.

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Sources:

1. Understanding the Current Ratio| Business Insider