Financial Measures of performance ~ What gets measured gets managed…

Financial Measures of performance ~ What gets measured gets managed…

Financial Performance Measures, Cash ,Corporate Finance,  income, Value, Returns, Dupont, ROI, MBA,ROE, EBID, EBIDTA, EVA, NOPAT,

What gets measured, gets managed ~ Peter Drucker

Performance Measures should be linked to Value. Managers are evaluated based on these measures.  Of course, there are extremely important non-performance measures like Customer Satisfaction, Quality, Cycle Time which is important and not captured in the objectivity of the financial measures.

So what are the financial performance of measures which are commonly used….

There are four main categories of financial measures, which are used for performance:
CASH
INCOME
RETURN
VALUE

CASH FLOW MEASURES

Gross cash flow

Earnings before interest, tax and depreciation/amortization (EBITDA)

INCOME MEASURES

Earnings before interest and tax (EBIT)
EBITDA – Depreciation/Amortization

Net operating profit after tax (NOPAT)
EBIT ( 1- tax rate)

Net Income (NI)
EBIT + Interest Income – Interest Expense

Earnings per share (EPS):
Net Income/ # of shares outstanding

RETURN MEASURES

Return on Equity (ROE):
Net income/Total common equity

Dupont ratio:
(NI/Sales) x (Sales/TA) = ROI

Identify value drivers based on different components of ROE

Return on Capital Employed (ROCE) or Return on Net Assets (RONA):
NOPAT/ Net Assets (TA-Current Liabilities)

SINGLE PERIOD VALUE ADDED MEASURES

Residual Income (RI):
EBIT minus a charge for assets

Economic Value Added (EVA):
Stern Stewart measure of economic profit minus a charge for capital employed

Net Operating Profit After Taxes (Stern Stewart) –  (Weighted Average Cost of Capital)  X (Capital  Employed)

Share this post

Leave a Reply

Your email address will not be published.