How to use your Financial Ratios
Apr 14, 2021 1:06:18 GMT
jjkrgr, Silverman AG, and 2 more like this
Post by WebLit on Apr 14, 2021 1:06:18 GMT
Your financial ratios can be found in the accounting section of your HQ and I’ve noticed that a lot of players have been wondering how to use them. An important thing to understand is that there won’t be a set number you can compare to as each company is run differently. This guide is meant for companies that have settled into an industry and are now looking to see what areas they could improve in.
Here is an example of a company’s financial ratios:
Gross Margin: Gross Profit / Sales
I find this statistic very simple and easy to use. Underneath your Company Value chart, you’re able to change the time period these statistics are going over. Change this to a longer time period, like a week or a month to find your average Gross Margin(assuming you’ve been running normal production for that whole time period). If you’re looking to make steady profits, try to keep your Gross Margin close to your average number. One easy way to do this is to use fixed pricing, where your prices remain the same regardless of market movements. This may not work as well if you are in the aerospace industry though, as your margins can vary greatly from day to day, especially if you have a sales office.
Operating Margin: Operating Income / Sales
Operating Margin uses Operating income(Gross Profit - Operating expenses) instead of gross profit, making it more unreliable to use than gross margin. This is because building upgrades over lvl 2 lose value. A building’s value is its scrap value(what you’ll get if you scrap the building). “Lost” value is put into operating expenses. One plus to using Operating margin is that it includes executive salaries. Still, I think usually companies will find gross margin, or return on sales(see below) to be more useful.
Return on Sales: Net Income / Sales
Return on sales uses Net Income. This means that building upgrades, exec salaries, patent conversion, bond income/interest, accounting overhead, contest donations, and achievements are included. As stated above, building upgrades can drastically reduce your CV. Patent conversion and achievements however can greatly increase your CV. Thus, return on sales can be more useful than gross profit for players looking to focus primarily on CV growth.
Return on Quick Assets: Net Income / (Cash + Receivable)
While having good potential, this statistic may not be as accurate as you’d like since the cash that is used here(receivables are just the cash available for collection over your retail buildings) is calculated just at rollover and is not your average cash throughout the whole day. If your cash at rollover does reflect the amount you usually have throughout the day, this value would show you what returns you are making on your money. If you want to increase this value, some players try reselling(buying products at lower prices and selling them for higher). This strategy requires quite a bit of time so don’t worry about this if you don’t have that luxury.
Return on Equity: Net Income / Stockholders Equity
Stockholders Equity here is simply your company value. If this number is becoming smaller and smaller over time, don’t worry! At a 1M company valuation, you would just need to make 10k per day to have a 1% Return on Equity. At a 1B company valuation, you would need to make 10M per day to have the same return. The amount of money a company is making will usually increase as they get bigger, but not at a linear rate.
Sales per Employee: Sales / Employees
Pretty self explanatory. Note that this value will vary depending on your margins. Companies that are vertically integrated will generally have a lower value than those that are horizontally integrated.
Income per Employee: Net Income / Employees
I find this one really useful. You can use this statistic to see your Net income per building level. 100 employees = 1 building level so simply multiply the value by 100. If your net income isn’t affected by building upgrades or another big change, you can use this to easily calculate your profit per hour per level. In the image above I am making 48.94 per employee. Multiply this by 100 to get 4894 per building lvl. So I am making 4894 a day per building level. To see how much per hour I simply need to divide by 24. 4894/24 is about 204. That leaves us with 204 per hour per lvl.
Inventory Turnover: (COGS + Freight out) / Inventory
Just showing how effective your inventory is at generating you sales. Companies that are hoarding(stocking up on lots and lots of inventory) will find their value much lower than companies that are mostly investing into patents.
Assets Turnover: Sales / Total Assets
You can see your total assets in your balance sheet. Your total assets are including inventory, which means that the value will probably be higher than your inventory. Because of this, your Assets Turnover will almost always be a lower value than your Inventory Turnover.
Operating Assets Turnover: Sales / (Current Assets + Deposits)
Same as assets turnover, except it does not include investment in bonds, buildings, and patents. This will probably be in between your Inventory Turnover and Assets Turnover.
Defensive Interval: (Cash + Receivable) / Daily Cash Expenditure
Simply put, how many days you can last spending as much as you did that day(or whatever time period you put) with the cash you have during rollover. The value you want to aim for depends on how active you are as a player. If you can only log in for a short time once per day, you should be trying to go for a Defensive Interval of at least one or higher. If you are much more active than that though, you don’t need that high of a Defensive Interval. Again, like return on quick assets, your number may get skewed every once in a while if your cash during rollover didn’t reflect what you have when you log on.
Interest Coverage: Operating income / Interest Expense
How many days your Operating income can satisfy your Interest Expense. Your interest payments(if you have any) from bonds shouldn’t be too hard to cover. Don’t be surprised if this value is much higher than 1. If you did upgrades and this value is below one, I don’t think you should worry as long as you still have cash to pay interest during rollover. However, if you ran normal production and this value is below one.. then we may have an issue.
Debt to Building Ratio: Bonds Payable / Buildings
Percentage of how much bonds you sold compared to your buildings. You can only sell bonds up to your building value so usually companies will have this value at 100% or below. It is possible to get this above that though since some of your buildings can be scrapped/downgraded even after you sold your maximum bonds. I recommend newer companies to get this value to 100%(or sell the maximum bonds possible) as bond money can be a very useful boost to your company. I suggest reading the bonds guide in the library if you want to learn more.
Hope this guide helped give you a few tips on how to improve your company using financial ratios or at the very least helped you understand the ratios. Remember, every company is different! You should not be comparing these values to others, but instead, to yourself.
Here is an example of a company’s financial ratios:
Gross Margin: Gross Profit / Sales
I find this statistic very simple and easy to use. Underneath your Company Value chart, you’re able to change the time period these statistics are going over. Change this to a longer time period, like a week or a month to find your average Gross Margin(assuming you’ve been running normal production for that whole time period). If you’re looking to make steady profits, try to keep your Gross Margin close to your average number. One easy way to do this is to use fixed pricing, where your prices remain the same regardless of market movements. This may not work as well if you are in the aerospace industry though, as your margins can vary greatly from day to day, especially if you have a sales office.
Operating Margin: Operating Income / Sales
Operating Margin uses Operating income(Gross Profit - Operating expenses) instead of gross profit, making it more unreliable to use than gross margin. This is because building upgrades over lvl 2 lose value. A building’s value is its scrap value(what you’ll get if you scrap the building). “Lost” value is put into operating expenses. One plus to using Operating margin is that it includes executive salaries. Still, I think usually companies will find gross margin, or return on sales(see below) to be more useful.
Return on Sales: Net Income / Sales
Return on sales uses Net Income. This means that building upgrades, exec salaries, patent conversion, bond income/interest, accounting overhead, contest donations, and achievements are included. As stated above, building upgrades can drastically reduce your CV. Patent conversion and achievements however can greatly increase your CV. Thus, return on sales can be more useful than gross profit for players looking to focus primarily on CV growth.
Return on Quick Assets: Net Income / (Cash + Receivable)
While having good potential, this statistic may not be as accurate as you’d like since the cash that is used here(receivables are just the cash available for collection over your retail buildings) is calculated just at rollover and is not your average cash throughout the whole day. If your cash at rollover does reflect the amount you usually have throughout the day, this value would show you what returns you are making on your money. If you want to increase this value, some players try reselling(buying products at lower prices and selling them for higher). This strategy requires quite a bit of time so don’t worry about this if you don’t have that luxury.
Return on Equity: Net Income / Stockholders Equity
Stockholders Equity here is simply your company value. If this number is becoming smaller and smaller over time, don’t worry! At a 1M company valuation, you would just need to make 10k per day to have a 1% Return on Equity. At a 1B company valuation, you would need to make 10M per day to have the same return. The amount of money a company is making will usually increase as they get bigger, but not at a linear rate.
Sales per Employee: Sales / Employees
Pretty self explanatory. Note that this value will vary depending on your margins. Companies that are vertically integrated will generally have a lower value than those that are horizontally integrated.
Income per Employee: Net Income / Employees
I find this one really useful. You can use this statistic to see your Net income per building level. 100 employees = 1 building level so simply multiply the value by 100. If your net income isn’t affected by building upgrades or another big change, you can use this to easily calculate your profit per hour per level. In the image above I am making 48.94 per employee. Multiply this by 100 to get 4894 per building lvl. So I am making 4894 a day per building level. To see how much per hour I simply need to divide by 24. 4894/24 is about 204. That leaves us with 204 per hour per lvl.
Inventory Turnover: (COGS + Freight out) / Inventory
Just showing how effective your inventory is at generating you sales. Companies that are hoarding(stocking up on lots and lots of inventory) will find their value much lower than companies that are mostly investing into patents.
Assets Turnover: Sales / Total Assets
You can see your total assets in your balance sheet. Your total assets are including inventory, which means that the value will probably be higher than your inventory. Because of this, your Assets Turnover will almost always be a lower value than your Inventory Turnover.
Operating Assets Turnover: Sales / (Current Assets + Deposits)
Same as assets turnover, except it does not include investment in bonds, buildings, and patents. This will probably be in between your Inventory Turnover and Assets Turnover.
Defensive Interval: (Cash + Receivable) / Daily Cash Expenditure
Simply put, how many days you can last spending as much as you did that day(or whatever time period you put) with the cash you have during rollover. The value you want to aim for depends on how active you are as a player. If you can only log in for a short time once per day, you should be trying to go for a Defensive Interval of at least one or higher. If you are much more active than that though, you don’t need that high of a Defensive Interval. Again, like return on quick assets, your number may get skewed every once in a while if your cash during rollover didn’t reflect what you have when you log on.
Interest Coverage: Operating income / Interest Expense
How many days your Operating income can satisfy your Interest Expense. Your interest payments(if you have any) from bonds shouldn’t be too hard to cover. Don’t be surprised if this value is much higher than 1. If you did upgrades and this value is below one, I don’t think you should worry as long as you still have cash to pay interest during rollover. However, if you ran normal production and this value is below one.. then we may have an issue.
Debt to Building Ratio: Bonds Payable / Buildings
Percentage of how much bonds you sold compared to your buildings. You can only sell bonds up to your building value so usually companies will have this value at 100% or below. It is possible to get this above that though since some of your buildings can be scrapped/downgraded even after you sold your maximum bonds. I recommend newer companies to get this value to 100%(or sell the maximum bonds possible) as bond money can be a very useful boost to your company. I suggest reading the bonds guide in the library if you want to learn more.
Hope this guide helped give you a few tips on how to improve your company using financial ratios or at the very least helped you understand the ratios. Remember, every company is different! You should not be comparing these values to others, but instead, to yourself.