For a Distributed Autonomous Organisation (DAO/ Community / Coop) to be more efficient than the current hierarchically structured orgs the Metrics have to be more Stringent, Transparent, and holistic.
We look at the Traditional Financial Metrics (ratios) and the Missing ratios to measure the health of a DAO.
Fundamental research - source: Corporate Finance Institute - Financial Ratios eBook
Profitability ratios are financial metrics used by analysts and investors to
measure and evaluate the ability of a company to generate income (profit)
relative to revenue, balance sheet assets, operating costs, and shareholders’
equity during a specific period of time. They show how well a company
utilizes its assets to produce profit and value to shareholders.Return RatiosMargin Ratios
Leverage ratios represent the extent to which a business is utilizing borrowed money. It also evaluates company solvency and capital structure. Having high leverage in a firm’s capital structure can be risky, but it also provides benefits.
The accounting equation can be rearranged to Equity = Assets – Liabilities. By using this as the numerator of the equity ratio, the ratio can be written as (Assets-Liabilities)/Assets. In other words, it would be the percentage of total assets after all liabilities have been subtracted.
For example, if Company XYZ has a total of $15 million in total shareholder’s equity and total assets are equal to $50 million, then the equity ratio of this company would be equal to 0.3. It typically is expressed as a percentage. Therefore, it would be 30% in the above example.
Efficiency ratios are used to measure how well a company is utilizing its assets and resources. These ratios generally examine how many times a business
can accomplish a metric within a certain period, or how long it takes for a business to fulfill segments of its operations.
Using the same example, at the end of a fiscal year, a company has credit sales of $50,000 and returns of $3,200. At December 31st, the company had accounts receivable of $6,000. At January 1st, accounts receivable was $3,000. Therefore, its accounts receivable turnover ratio for this fiscal
period (365 days) would be = (50,000 – 3,200) / ((6,000 + 3,000) / 2) = 10.4. We can use these numbers to calculate the accounts receivable days, which would be = 365 / 10.4 = 35.1.
Analyzing this, it takes the company 35.1 days on average to collect its accounts receivables. As with the accounts receivable turnover ratio, this number should be compared to industry averages to see how efficient the company is in collecting payments versus its competitors.
Please note, an analyst can also choose to use period end total assets instead of average total assets.
In this example, a company has net sales of $100,000 for the year. On December 31st, the company had total assets of $65,000. On January 1st, the company had total assets of $57,000. The company’s
asset turnover ratio would then be = 100,000 / ((65,000 + 57,000) / 2) = 1.64. This means that for every dollar of total assets, the company generates about $1.64 in net sales. Like many other ratios, a single period’s asset turnover ratio is not very useful on its own. However,
when compared to the asset turnover ratios of comparable companies in the same industry, it can reveal how well the company is doing relative to competitors. The ideal or average asset turnover ratio depends on the company's industry.
A higher ratio is generally favorable as it indicates efficient use of assets. Conversely, a low ratio may imply poor utilization of assets, poor collection methods, or poor inventory management.
9.84. This number means that the company sold its entire stock of inventory 9.84 times in the fiscal year. We can use these numbers to calculate the inventory turnover days, which would be = 365 / 9.84 = 37.1.
- Analyzing this, it takes the company 37.1 days on average to sell an entire inventory stock. As with the inventory turnover ratio, this number should be compared to industry averages to see how efficient the company is in converting inventory into sales versus its competitors.
Liquidity ratios are used by financial analysts to evaluate the financial soundness of a company. These ratios measure a company’s ability to repay
both short-term and long-term debt obligations. Liquidity ratios are often used to determine the riskiness of a firm to decide whether to extend credit to the firm.
Compared to the current ratio, the quick ratio only looks at the most liquid assets. The quick ratio evaluates a company’s ability to pay its short-term liabilities with only assets that can quickly be converted into cash. Therefore, the quick ratio excludes accounts such as inventories and prepaid expenses.
If a company has cash of $20 million, marketable securities of $10 million, accounts receivable of $18 million, and current liabilities of $25 million, it has a quick ratio of 1.52. This means that the business can pay off its 1.52 times its current liabilities using its most liquid assets.
A quick ratio greater than 1 strongly implies financial well-being for the company as it shows that
the company can repay its short-term debt obligations with only its liquid assets. However, like the
current ratio, a quick ratio that is too high also suggests that the company is leaving too much
excess cash instead of investing to generate returns or growth.
Defensive Interval Ratio (DIR)
Times Interest Earned Ratio (TIE)
Times Interest Earned (Cash - Basis) Ratio (TIE - CB)
For example, a company has cash flow from operations of $15,000, fixed advertising costs of $2,500, fixed rent costs of $3,000, fixed utilities costs of $500, interest expense of $1,000, and income taxes of $500. Based on this information, the company’s TIE-CB ratio would be = (15,000 +2,500 + 3,000 + 500 + 500) / 1,000 = 21.5
Like the TIE ratio, it is important to compare the TIE-CB ratio to a company’s historical TIE-CB ratios to look for trends. An increasing TIE-CB ratio implies financial health. Alternatively, it could be compared to comparable companies to see how the company is performing relative to its competitors. Also like the TIE ratio, having too high of a TIE-CB ratio implies underutilized excess cash
CAPEX to Operating Cash Ratio
Typically, smaller companies that are still growing and expanding have higher CAPEX to operating cash ratios. These smaller companies usually need to invest more in research and development (R&D). Lower ratios may indicate that a company has reached maturity and is no longer pursuing
While a high CAPEX to operating cash ratio is generally a good sign for a growing company, a ratio that is too high may not be a good sign. If a company is spending all its cash in capital expenditure projects, it may face liquidity issues in the future. Heavy capital expenditures may compromise a
company’s ability to fulfill its periodic debt payments. Conversely, if the ratio is too low for a smaller company, it may imply that it is not investing enough into R&D or other capital projects, which may compromise a business's growth potential.
Operating Cash Flow Ratio
A company’s cash flow from operations is one of the most important numbers in a company’s accounts. It reflects the cash that a business generates solely from its core business operations. It is derived from the core offering of the company.
If a company has cash flow from operations of $120,000 and current liabilities of $100,000, it has an operating cash flow ratio of 1.2. This means that the company earns $1.25 from operating activities for every dollar of current liabilities. Alternatively, it also means that the company can cover 1.2 times its current liabilities with its operating cash flows.
The operating cash flow ratio is different from other liquidity ratios such as the current ratio. Unlike other liquidity ratios that use the assets that are currently held by the company in their calculations, the operating cash flow ratio looks at a company’s cash flow. For example, having too high of a
current ratio implies that the company is inefficient in using its excess cash which may caution analysts. Conversely, having a high operating cash flow ratio does not imply poor performance as it shows that a company is efficient in generating cash flows per dollar of current liabilities.
Multiples valuation ratios are used by financial analysts to calculate the value of a company. These ratios can be used to determine the share price of a company going public, a target price for an equity research report, or if a company is under- or over-valued relative to its peers.
Price to Earnings Ratio
Companies with a high P/E ratio are often considered growth stocks. This indicates positive future performance and earnings growth as investors are willing to pay more per dollar of current earnings. However, growth stocks are usually more volatile and have more investor pressure to perform well. Stocks with high P/E ratios may also be considered overvalued. Conversely, companies with a low P/E ratio are often considered value stocks. They are undervalued relative to their competitors and the company's intrinsic value. These stocks are a bargain that investors aim for before the markets correct their valuations on them.
The P/E ratio can also be used to compare stocks at different prices.
For example, if Stock A is trading at $30 and Stock B at $20, Stock A appears to be more expensive. However, if Stock A had a lower P/E ratio than Stock B, its price per unit of earnings would be lower than Stock B, thus making Stock A cheaper from an earnings perspective.
Enterprise value ratios are calculated using a company’s enterprise
value to drive the valuation process. These ratios measure the return on
a company’s capital investments. Many enterprise value ratios also
isolate earnings from accounting-affected items such as interest and
EV/ EBIT = Enterprise Value (Market Cap + Net Debt) / Earnings before Interest and Tax
Market Capitalization = Share Price x Number of Shares
Net Debt = Market Value of Debt – Cash and Cash Equivalents
Though less commonly used than EV/EBITDA, EV/EBIT is an important ratio when it comes to valuation. It can be used to determine a target price in an equity research report or value a company compared to its peers. The major difference between the two ratios is EV/EBIT’s inclusion of depreciation and amortization. This is useful for capital-intensive businesses where depreciation is a true economic cost.
In this example, Company A is going public, and analysts need to determine its share price. Company A has five similar companies that operate in its industry, Companies B, C, D, E, and F. The EV/EBIT ratios for these companies respectively are 11.3x, 8.3x, 7.1x, 6.8x, and 10.2x. The average EV/EBIT would be 8.7x. A financial analyst would apply this 8.7x multiple to Company A’s EBIT to find its EV and its, equity value and share price.
Compared to other ratios, EV/Revenue is most often used when a company does not have a positive EBITDA or net income. It can be used to determine a target price in an equity research report or value a company compared to its peers.
For example, Company A is going public and analysts need to determine its share price. Company A has five similar companies that operate in its industry, Companies B, C, D, E, and F. The EV/Revenue ratios for these companies respectively are 12.1x, 11.3x, 10.8x, 9.2x, and 13.4x. The average of EV/Revenue would be 11.4x. A financial analyst would apply this 11.4x multiple to Company A’s Revenue to find its EV and its equity value and share price.
A quick overview of the DAOcommons Protocol is below.
With the above Protocol, we can start with babysteps of listing down all the absolute parameters we can measure within a well functioning DAO
Simple two or 3 parameter Ratios to measure the health of a DAO with the wellbeing of an individual at its core