Using The Right Financial Metrics For Your Business

June 26, 2025

Measuring the financial performance and health of your business is critical to its success. For business owners and finance leaders, ensuring you are using the right financial measures can be a challenge. Many business leaders default to net income in assessing the results of their operations, and for good reason – it is the primary metric for profitability under generally accepted accounting principles and easily obtainable from reports in most accounting systems. However, net income by itself does not provide a full picture of results, and may even be misleading in certain circumstances.

Benefits and Drawbacks of Net Income

Net income is a fundamental indicator of your company’s profitability, reflecting the bottom-line result after all revenues and expenses have been accounted for, including taxes and interest. It’s simple to obtain and frequently easy to compare against industry peers, making it a go-to figure for high-level assessments. However, its simplicity can mask underlying issues. Net income can be influenced by one-time events, accounting adjustments, and non-cash expenses, like depreciation, that may not be relevant for certain decisions. Additionally, net income is a measurement of a company’s results for a given period; in certain instances, leaders may be better served in considering point-in-time metrics related to liquidity or financial leverage.

Beyond Net Income: Key Metrics to Consider

To gain a more nuanced view of financial health, business leaders should pair net income with complementary metrics that offer insight into cash flow, liquidity, and returns on investment. Frequently reviewed metrics include:

• Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): Calculated as net income plus interest expense, taxes, and depreciation/amortization expense, EBITDA is a common metric used to easily approximate core profitability, earnings available to fulfill debt obligations, and even as a proxy for cash generated by operations. This metric is often used in valuations and performance comparisons.

• Operating Cash Flow: While net income can look healthy, insufficient operating cash flow may indicate challenges in sustaining day-to-day operations. This metric shows how much actual cash the business is generating from its core activities and is included within the Statement of Cash Flows.

• Free Cash Flow (FCF): Calculated as operating cash flow minus capital expenditures (cash spent on long-term assets, like real estate or equipment). FCF is a critical financial metric that indicates the amount of cash generated by operations and available for future investment or financing activities, including dividend payments to shareholders or the repayment of debt.

• Gross Profit: Represents revenues less costs directly associated with producing and selling products and services. For a retailer, this would be the revenue from all sales minus the cost of the products sold during the period. The metric is critical for understanding the profitability of different products and services.

• Current Ratio: Calculated as current assets divided by current liabilities. An asset or liability is considered current if it is expected to be converted to cash, sold, consumed, settled, or repaid in either its normal operating cycle or within one year (whichever is longest). The current ratio helps assess a company’s ability to meet short-term obligations. Comparing this metric over time can provide valuable insights into a business’s cash cycle.

• Turnover Ratios: Commonly calculated for inventory (cost of goods sold divided by average inventory) and accounts receivable (net credit sales divided by average accounts receivable), these are efficiency ratios that measures how quickly a company sells its inventory or collects its receivables. Dividing these ratios into 365 (days in a year) will provide the number of days it takes to turnover each asset entirely (Days Sales Outstanding and Days Inventory Outstanding metrics).

• Return on Assets (ROA) and Return on Equity (ROE): Related to net income, these efficiency metrics are calculated as net income divided by either average assets (ROA) or average shareholders’ equity (ROE). They provide insights into how well a company is utilizing its assets and capital to generate profits, which is a key indicator of long-term viability, investor appeal, and opportunity cost associated with the business or investment.

Industry-Specific Metrics

In addition to the commonly used metrics identified above, certain industries have adopted specific metrics that present business results in ways that may better account for their unique circumstances. Specific consideration should be given to a businesses’ industry when assessing results, in particular when comparing results against peers.

Tailoring Metrics to Your Business Strategy

There’s no one-size-fits-all approach. The right mix of financial metrics depends on your industry, growth stage, and strategic goals. Stradiot Consulting & Advisory can provide tailored reporting to better help you assess the results of your business, make decisions, and plan for the next step.

This article is for informational purposes only and should not be relied upon as financial, investment, or business advice. If you would like personalized guidance and support, please contact us.