By now it is well established: entrepreneurs and managers, in the immediate future, will have to become increasingly accustomed to and familiar with Corporate Financial Indicators, or corporate financial KPIs, i.e., key performance indicators. This is not only because of new and changed legal requirements (e.g., the new corporate crisis legislation and its early warning systems), but also because there is an increasing need for corporate governance based on an adequate management control system.

The analysis of KPIs and corporate financial indicators and their constant monitoring leads, in fact, to an important and immediate advantage for the entrepreneur: basically, the ability to control the various functional areas is increased, resulting in greater serenity and entrepreneurial peace of mind in devoting oneself to business development, knowing that they always have a picture, updated and secure, of the management trend.

In this and other blog articles, we will examine some of the main KPIs or performance indicators and their interpretation, focusing particularly on financial KPIs, trying, where possible, to convey their usefulness, including some practical examples.

Net Financial Position (NFP)
Gross Operating Margin (GOP)
Debt repayment capacity (NFP/MOL)

FINANCIAL INDICATORS: NET FINANCIAL POSITION AND GROSS OPERATING MARGIN

1. Net Financial Position (NFP)

The calculation of the Net Financial Position is one of the main performance indicators (KPIs) and is used to assess the solvency of the company: the NFP indicator allows, in essence, to determine the overall level of the company’s debt, both short-term and medium/long-term.

Net Financial Position expresses the balance between financial debts and financial assets and, therefore, expresses the net financial debt of the enterprise.

In order to calculate the overall level of debt, it is first necessary to reclassify the balance sheet and distinguish, within assets and liabilities, items that are purely financial in nature.

Financial liabilities mean amounts due to banks, shareholders, and all those debts that are in the nature of financing. On the other hand, financial assets mean receivables of a financial nature, such as receivables from subsidiaries/associates. Obviously, it is important to distinguish these items by short term (within the financial year) and medium to long term (beyond the financial year) maturity.

The calculation formula generally used is the following:

• Cash + Short-term financial receivables – Short-term financial debts = Short-term NFP
• Short-term NFP + Medium/long-term financial receivables – Medium/long-term financial debts = NET FINANCIAL POSITION

2. Gross Operating Profit (GOP)

Gross Operating Profit or Ebitda (earning before interests, taxes, depreciations and amortizations) is the company’s operating income before depreciation and amortizations.

It is a very important indicator, since, on the one hand, it is the starting point for arriving at a definition of the cash flows that the company can generate, and on the other hand, in the case of valuations of the company as a whole, it is used (together with particular multipliers dependent on the company’s industry) to establish a benchmark in the context of extraordinary M&A (Mergers & Acquisitions) transactions.

GOP is calculated by reclassifying the company’s income statement according to the value-added scheme:

• Value of production – External costs = Value added
• Value Added – Personnel Costs = Gross Operating Profit GOP (EBITDA)

3. Debt repayment capacity (NFP/GOP)

Considering these two indicators just analyzed, it is possible to use them to get an ‘indication of the company’s ability to use its operating profit (GOP).

Indeed, a firm’s ability to repay debt depends on its ability to generate positive cash flows sufficient to repay its lenders. These positive cash flows come from sales and, in a more restricted way, from core operations.

Thus, referring to Turnover and EBITDA, on an annual basis, we can get:

• NFP / EBITDA: Expresses the company’s ability to cover debt through cash flows from operations.
• NFP / Turnover: Expresses the company’s ability to cover debt through cash flows from sales.

For both indicators, the lower the ratio, the faster the enterprise returns from financial exposure.