Complete guide to financial metrics and KPIs for your eCommerce

Analyze financial KPIs, make informed decisions, improve profitability and optimize your finances. Discover the guide to financial KPIs for your eCommerce.

Today, eCommerce has become an innovative force in the business world, not only because of its global reach, but also because of the new range of market opportunities it has opened up. All of them are striving for success and maximizing their growth. However, you may wonder how an eCommerce owner, such as yourself, can measure financial performance and make strategic decisions to succeed.

This is where financial metrics and KPIs play a very important role. Analyzing them has become essential to boost the success and growth of any eCommerce business, as they offer a complete and objective view of the financial performance of a business, allow you to identify areas for improvement and make data-backed decisions to boost it.

In this article, we will discover the financial indicators that every eCommerce should analyze, learn how they are calculated, and how they can be applied to improve the financial profitability of your business.

Quick Ratio / Acid Test

The Quick Ratio, also known as the Acid Test Ratio, is a financial indicator that, like the Current Ratio, analyzes a company's ability to pay its short-term obligations. The main difference between the Current Ratio and the Quick Ratio is that the latter evaluates a company's liquidity from a more conservative standpoint, as it excludes inventories from the calculation. The Quick Ratio is calculated by dividing liquid assets (cash, accounts receivable, short-term investments) by current liabilities. Within these liquid assets, inventories are not included as they can be more difficult to convert to cash compared to other assets. The Quick Ratio formula is:

Quick Ratio = Liquid Assets / Current Liabilities

The Quick Ratio result represents the company's ability to pay its short-term debts using only the most liquid assets. Therefore, a high Quick Ratio (greater than 1) shows that the company has sufficient capacity to meet its short-term obligations without relying heavily on inventory sales.

It is important to note that although the Quick Ratio does not provide a complete picture of a company's financial health, it is a more rigorous indicator of a company's liquidity than the Current Ratio because it excludes inventories, which is a less liquid asset.

Cash Conversion Cycle

The Cash Conversion Cycle (CCC) is a financial indicator that measures the time it takes for a company to convert its inventory investments into cash. In other words, it measures the amount of time, expressed in days, it takes to convert its inventory inflows into cash. The Cash Conversion Cycle formula is as follows:

Cash Conversion Cycle (CCC) = DIO + DSO - DPO

Where:

DIO refers to "Days Inventory Outstanding", i.e., the average number of days a company holds its inventory before selling it. To calculate it, it is necessary to divide the average inventory by the Cost of Goods Sold (COGS), and multiply it by 365.
DSO stands for "Days Sales Outstanding". Days Sales Outstanding is the average number of days it takes a company to collect its accounts receivable. It is calculated by dividing the average sales receivable by the sales total, and multiplying by 365.
DPO stands for "Days Payable Outstanding", and is the average number of days it takes a company to pay its invoices to suppliers. It is calculated by dividing the average accounts payable by the Cost of Goods Sold (COGs), multiplied by 365.

In short, the Cash Conversion Cycle allows you to measure the company's level of efficiency in managing working capital. The lower the Cash Conversion Cycle, the better, as it means that the company has sufficient liquidity to meet its short-term obligations.

Return on Assets (ROA)

Return on Assets (ROA) is a financial metric that measures the profitability of a company's assets. In other words, it measures the return on assets. It is calculated by dividing the company's net income by the average total assets during a given period. The formula is as follows:

ROA= (Net Profit / Average Total Assets) * 100

Where:

Net Income is calculated by subtracting all total expenses, including taxes, from total revenues.
Average Total Assets is obtained by adding the assets at the beginning and end of the period and dividing by two.

ROA is a measure of a company's ability to efficiently use its assets and generate profits from them. Therefore, a high ROA indicates efficient asset management. Conversely, a low ROA indicates inefficiency in the management and handling of assets or a lack of profitability in relation to the assets.

Return on Equity (ROE)

Return on Equity (ROE) is a financial metric that measures the efficiency with which a business uses the financial resources of its shareholders. It is calculated by dividing the company's net income by its shareholders' equity. Therefore, the formula would be:

ROE = (Net Income / Shareholders' Equity) * 100

Where:

Net income: Refers to the net profit, after subtracting taxes, obtained by a company in a given period.
Equity: Represents the shareholders' investment, i.e., the resources that constitute the company's own financing.

The importance of ROE lies in the fact that it measures the profitability generated by each monetary unit invested by the shareholders. It is a very useful metric for both the owners of a company and investors, as it allows them to evaluate the efficiency of the company's financial management.

A high ROE, the most desirable scenario, means that the business is generating good returns on invested capital. On the other hand, a low ROE indicates inefficiency in the use of financial resources.

How RITMO Insights helps you monitor your financial KPIs

At RITMO, we know how essential it is to have the necessary tools to monitor the metrics and financial KPIs of your eCommerce and optimize your results. That's why RITMO Insights was born, the comprehensive solution specifically designed to help you measure and boost your business performance.

RITMO Insights is a growth analytics platform for eCommerce that gives you free access to a wide variety of sales, financial, marketing and customer service metrics.

RITMO Insights not only tracks the most important KPIs for your eCommerce in detail, but also provides you with clear and detailed reports to make data-backed decisions and optimize your eCommerce performance.

Registration takes no more than 5 minutes, so connect your accounts now and don't wait to take your business to the next level with RITMO Insights!