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MEASURING ORGANIZATIONAL PERFORMANCE:

A BEST PRACTICE GUIDE TO FINANCIAL INDICATORS

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he fundamental purpose of every business enterprise is to consistently


outperform the competition and deliver sustained, superior returns to
the owners while satisfying other stakeholders. The measurement of how
successful firms are at achieving this purpose is a key issue for practitioners and
researchers. From a practitioner perspective, financial metrics are important because
they are the primary way performance of both firms and top leaders are evaluated,
and they inform decisions about the firm made by internal and external stakeholders
(Verbeeten and Bonns, 2009). From a research perspective, financial metrics are
important because they are extensively used as the criterion measure to evaluate
the impact on firm performance of a diverse range of interventions, such as human
resource practices or advanced manufacturing technologies.
Therefore, it is of serious concern to both practitioners and researchers that there is
little consensus on how firm performance should be measured. Richard et al. (2009)
report that over a three year period (2005-2007), 231 papers in five of the top business
academic journals included measures of organizational performance, and within
these papers 207 different performance measures were used. These results, which
are comparable to those found by March and Sutton (1997) in their survey 10 years
earlier, lead the authors to comment, Our review indicates that despite its recognized
importance, researchers pay little theoretical attention to, or display methodological
rigor about, the choice, construction and use of the plethora of performance measures
available to them. Similarly, Crook et al. (2011), in an analysis of those papers in
the top academic journals that study the human capital-performance relationship,
identify 66 studies where 35 different performance measures were used.
Nevertheless, broad agreement does exist among owners, leaders, researchers, policy
makers and other key stakeholders that financial measures provide the foundation for
business performance measurement. Three categories of financial measures have been
developed and used: accounting, market and hybrid measures. Furthermore, frontier
analysis, a method widely used in economic modeling to compare efficiency across
firms, has been proposed by Devinney et al. (2010) to measure performance. Frontier
analysis may enable practitioners and researchers to overcome many of the traditional
difficulties associated with combining different financial measures.

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This paper reviews the financial metrics used to measure business performance, and
suggests best practice ways forward. Section II discusses the major challenges posed by
business performance measurement. In Section III the primary accounting, market
and hybrid measures of firm performance are described and evaluated. Section IV
analyzes the bundle of indicators that could be used to create a reliable measure of
performance. Section V reviews the Frontier Analysis. Section VI concludes.
II. THE MAJOR CHALLENGES POSED BY BUSINESS PERFORMANCE MEASUREMENT

Three key challenges are associated with measuring the performance of business
enterprises: measurement complexity, measurement time span and measurement
benchmarking. These challenges underpin the lack of consensus regarding business
performance management.

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Measurement Complexity
Several factors mean that a single construct cannot be used
satisfactorily to measure business performance. We discuss two
factors here. First, businesses have different stakeholders with
diverse needs who use different performance dimensions to
judge firm effectiveness. In addition, for a variety of reasons,
the desirability of the different business performance outcomes
varies across countries. Hence, in the U.S. and UK great
importance is attached to shareholder returns, whereas in Japan
and Germany the maintenance of employment is more highly
valued (Devinney et al. 2010). Second, the different business
environments, strategies, capabilities and resources of firms
lead them to focus on different performance dimensions. For
instance, businesses seeking to establish a dominant position
in newly emerging industries (as in the case of Amazon.com),
or to gain a strong base in an established industry (as in the
case of Toyota when they entered the U.S. car market) may
sacrifice short term profitability in order to build sales and gain
market share. In contrast, firms in a very competitive market
during a recession may let market share fall in order to boost
cash flows. Hence, the inherently complex nature of business
in the modern world means that it is not possible to gauge
firm performance with a single metric. Several dimensions are
required to adequately capture the performance of firms.
Measurement Time Span
Depending on the question of interest, practitioners and
researchers apply very different time horizons when evaluating
firm performance. Some shareholders adopt a relatively short
timescale, while researchers have adopted ten-, twenty- or even
fifty-year timescales to explore the maintenance of superior
performance (Jacobsen, 1988; Maruyamaa and Odagirib,
2002). Therefore, when it comes to the measurement of
firm performance, there is no standard time horizon of
measurement.
Measurement Benchmarking
In market economies, firms compete against each other and
try to dominate their peers by building competitive advantage.
This enables sustained superior performance to be achieved for
a period of time. Firms can build competitive advantage by
molding their industrial environment to their own advantage
(Porter, 1980) and/or by building durable and distinctive
firm capabilities and resources (Conner, 1991), or through
innovation. This means that the performance of firms has to
be judged through a process that compares them with their
peers. However, the process of making peer comparisons
between businesses is not straightforward because each firm
has a unique mix of participation in different industries,
market segments and countries, which sometimes makes the
selection of peers for comparison difficult. Furthermore, the
different systems of industry classification have strengths and
weaknesses which impinge on, and affect the results of, the
measurement process.

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In summary, the approach we choose to measure business


performance needs to tackle these challenges as effectively and
efficiently as possible and, we believe, only if this is reasonably
accomplished will a valid consensus on business performance
measurement be possible.
III. FINANCIAL PERFORMANCE MEASURES FOR BUSINESS

Richard et al. (2009) identify three broad groups of measures


of organizational performance: accounting, market and hybrid
measures. Table 1, 2 and 3 lists the indicators corresponding to
each group of measures with a brief description of each measure.
Accounting Measures
Accounting measures have existed since the 17th century
and remain the most commonly used metrics to evaluate
business performance (Richard et al., 2009). We identify six
main accounting measures: return on assets (ROA), return on
sales (ROS), return on equity (ROE), return on investment
(ROI), return on capital employed (ROCE) and sales growth
(SG). Accounting measures have several strengths. They are
widely available because governments require firms to publish
accounting data and the fact that they are subject to internal
controls within firms enhances their reliability (Richard et al.,
2009). In addition, accounting measures are relatively easy to
calculate and they integrate the results of complex organizational
entities into coherent and reasonably understandable metrics
(Verbeeten and Bonds, 2009). Most importantly, accounting
measures are used by leaders and managers to monitor and assess
the firms performance and to make strategic and operational
decisions (Rowe and Morrow, 1999).
However, accounting measures are considered to have several
well-documented limitations. First, they focus on historical
performance and do not attempt to anticipate future results.
Second, accounting measures do not provide information on
whether a company is increasing its long-term value, as they
only provide a measure of short-term performance (CIMA,
2004). Third, accounting measures can be distorted by a variety
of factors including government policy, inconsistency in the
rules on the accounting systems based on Generally Accepted
Accounting Principles (Richard et al., 2009), and deliberate
misrepresentation. Fourth, certain measures such as net income
and sales vary significantly among companies and industries.
For example, Lehman Brothers sales in August 2008 were
much higher than those of BT. However, BTs performance
was better because it was able to survive during that period
of economic turmoil. Finally, and perhaps most critically,
accounting measures do not include the opportunity cost of the
equity capital invested by shareholders, that is, what investors
could have earned if they had invested somewhere else (Kimball,
1998). This omission means that it is possible for firms to appear
to be making a positive return, when the underlying economic
reality can be a negative return as the investor could have made
other higher returns.

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Market Measures
We identify two groups of market measures: shareholder-value
measures and competition-based measures.
Shareholder-Value Measures

Economic theory proposes that organizations should optimize


the use of investment capital and, therefore, maximize the
returns that are gained from this investment both in the shortand the long term. This has led to the creation of shareholdervalued based financial measures of firm performance that
incorporate both debt and equity capital.1 This trend has been
reinforced by the shareholders of firms who are naturally keen
to understand the results they are achievinga pressure that
has been strongest in Anglo-Saxon countries (primarily the
U.S. and UK) where shareholder return tends to be considered
the fundamental goal of businesses.
However, shareholder-value measures have limitations. First,
they are mainly based on stock prices, which may change due
to external factors that are not related to the performance
of the company (such as oil price shocks or macroeconomic
fluctuations). Additionally, the relationship between stock
prices and financial performance may differ among countries
depending on the efficiency of the financial markets. Third,
market measures are based on the assumption that the firm is
an investment instrument for the shareholder (Richard et al.,
2009); therefore, using market measures in countries with nonefficient financial markets and where the shareholder return is
not the first objective could give misleading conclusions. Finally,
although shareholder value measures should provide good
prospects about future profitability, they can be untrustworthy,
as evidenced in the dotcom speculative bubble between 1995
and 2001 (Yip et al., 2008).
Competition-Based Measures

Economic theory also suggests that when an organization


becomes more efficient and is able to lower its prices due to
improved technology, it can increase its sales, and therefore,
overcome its competitors (Chang and Sing, 2002). Several
competition measures have been proposed to compare how
a firm is performing relative to its competitors. We discuss
three of them: market share, labor productivity and sales per
employee.
Market share is the proportion of the total available
market that is being served by an organization
Labor productivity is discussed in two ways. Caves
(1974), Globerman (1979) and Kokko (2006) use labor
productivity to compare efficiency among organizations
in a specific industry. They define labor productivity as
the total output divided by the number of employees.
Patterson et al. (1997) propose the use of an alternative

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measure of labor productivity. They define labor


productivity as the ratio of sales over employment in the
firm, divided by the ratio of sales over employment in
the entire industry
Sales per employee ratio evaluate a companys sales in
relation to its number of employees
However, competition-based measures are relatively less-used in
the literature than accounting or shareholder value measures,
and they are not comparable across industries. For example,
suppose that firm X raises capital to buy firm Y. Firm X sales
would grow massively in the following period, which in turn
would increase its market share. In this case its improved
performance is due to the merge, rather than an actual increase
in efficiency. Additionally, some of the market measures are not
easy to calculate. Estimating market share or labor productivity,
for example, requires proper and well-conducted research
on market definition to identify in what industry the firm is
operating.
Hybrid Measures
Richard et al. (2009) and Devinney et al. (2010) suggest the use
of hybrid measures that are able to overcome the drawbacks and
keep the advantages of accounting and market measures. We
identify three hybrid measures: the Tobins q, the Altmans Z
score and economic value added. Wassermann et al. (2001) and
McGahan and Porter (1999) suggest the use of the Tobins q.
The Tobins q, developed by James Tobin (1969), measures
a companys market value in relation to its total assets value.
Alternatively, Short et al. (2007) propose the use of the Altmans
Z-score. The Altmans Z-score, created by Edward Altman
(1968), is an index composed of five different financial ratios
that indicate the likelihood of bankruptcy. Although the Tobins
q and the Altmans Z score provide information about the risk
and future contingencies that may arise in an organization, they
may be very volatile across periods. For example, in periods of
economic stagnation, stock prices become more volatile, this
affects the market value of a company and, in turn, its Tobins
q. Therefore, during a recession a firms Tobins q might not
reflect true performance. Similarly, high risk of a potential
bankruptcy (low values of the Altmans Z score) during a period
of uncertainty may not reflect the true performance of an
organization.
Hawawini et al. (2003) propose the use of economic value added
(EVA), also known as economic profit. EVA provides helpful
information about the short- and long-term performance
under both an investment and competitive point of view. EVA
has become very popular since its introduction by Stern and
Stewart (1996), because it considers both the returns and the
opportunity costs of investing in an organization. Dumitru

Debt capital is the capital that a business raises by issuing bonds or taking out a loan. Conversely, equity capital is the amount of capital raised from owners in the company.

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and Dumitru (2009) argue, however, that EVA has some


weaknesses. First, EVA does not measure performance correctly
in periods of high inflation because it depends on indicators
that are highly influenced by raising prices, such as operating
profit and the cost of capital. Second, a study conducted by
INSEAD, a world leading business school, suggests that some
of components of EVA vary significantly across industries.
Therefore, a firm which operates in a low-EVA industry may
be performing well but its EVA may be low. Finally, EVA is
distorted by depreciation because it depends on the structure
of the assets of a company (current assets, depreciating assets,
etc). Consequently, companies with low or high EVA may
underestimate their true profitability.
IV. CHOOSING THE BEST FINANCIAL MEASURES

As there is no single, agreed upon and overall financial


measure of firm performance, researchers have made use of
multiple measures to get a more complete understanding
of an organizations results and prospects (Richard et al.,
2009). In this section, we propose a methodology to select
an appropriate bundle of financial measures that takes into
account the following criteria:



Measurement complexity challenge


Measurement time-span challenge
Measurement benchmarking challenge
Usage to date criterion: how often the literature has
used the financial indicator
Comparability criterion: how well the indicator can be
comparable across companies and industries
Ease criterion: how easy it is to get data from public
sources and to estimate it
Economic-investment criterion: how well the indicator
provides information on economic and investmentrelated issues (competition, shareholder return, etc.)
Tables 4, 5 and 6 summarize the strengths and weaknesses
of each measure according to the above-mentioned criteria.
We use three scores for each category: 1 for weak, 2 for
medium and 3 for strong. Considering for example EVA,
the table shows that it has the advantage of being extensively
used in the literature, carrying useful economic implications
and challenging the time span (strong, or score 3). On
the other hand, it is not easy to compute due to both data
requirements and methodological difficulties (weak, or score
1). In terms of comparability it is classified as medium (or
score 2) because, although it allows comparisons across
companies, it fails to capture differences across industries.
The table shows that no measure of organizational performance
prevails. This suggests that the use of multiple measures is
desirable to provide a broader picture of an organizations
performance and to balance the weaknesses and strengths of
each measure. We select measures of each group according to

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the categories; each measure is evaluated on each scientific and


non-scientific criteria. Among the accounting measures, return
on assets (ROA) and return on sales (ROS) dominate because
of their usage and simplicity to estimate. Concerning the
market measures, we divide our analysis in two sub-bundles of
measures: the shareholder value measures and the competition
measures. The shareholder value measures comprise diluted
earnings per share (DEPS) and total shareholder return (TSR).
TSR is a superior measure if we consider the performance
measure time span challenge because, unlike DEPS, it
provides information about future prospects of profitability.
The competition measures comprise market share (MS), sales
per employee (SpE), and two measures of labor productivity:
value added per worker and the ratio of SpE in the firm to
SpE in the industry. We propose the use of MS and labor
productivity (provided by Patterson 1997) because they
evaluate how a firm is performing relative to its competitors
(measurement benchmarking challenge) and provides useful
information on how the company has been performing in
the long-term (measurement time span challenge). Also, the
two measures of labor productivity and sales per employee are
based on indicators that vary significantly across industries. In
terms of hybrid measures, even though the Altmans Z score is
easier to estimate than the EVA and Tobins q, it has scarcely
been used in the literature and does not provide a clear picture
on how the company is performing with respect to its peers
(measurement benchmark); a company with a low risk of
bankruptcy is not necessarily performing well.
V. FRONTIER ANALYSIS TO MEASURE ORGANIZATIONAL
PERFORMANCE

Based on the above review, we propose the use of ROA, ROS,


TSR, MS, Tobins q and EVA to measure organizational
performance. This then prompts the question: how do you
combine different measures? Devinney et al. (2010) identify
three different ways of using multiple measures of performance.
The first consists of performing different quantitative
techniques with each of the variables used and
comparing the results. Most of the literature has used
this methodology (Lieberson and OConnor, 1972;
Short et al., 2007; Ahn et al., 2004)
The second combines different measures to create a
single score. For example, McGahan (1999) creates a
hybrid measure based on accounting profitability and
the Tobins q
The third approach, which has been scarcely used in
the literature, employs the data envelopment analysis
(DEA) by using frontier analysis
DEA, which was introduced by Charnes et al. (1978), is a
widely used technique in economics to estimate and compare
the efficiencies of firms. As an example, suppose that a set
of firms operating in an industry use two inputs, labor and

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capital, to generate output, but the managerial capacity and


organizational skills of those firms will be quite different
some firms may be less efficient than others. DEA estimates
the maximum output that could be obtained from the given
inputs; this is the production frontier. The distance a firm
is from the frontier is a measure of the technical efficiency of
that firm.
The curve in the Figure 1 displays the performance possibility
frontier considering only two performance measures: ROA
and EVA. Those firms located at points A, B and C are
efficient because they lie on the performance possibility frontier
curve. The performance efficiency level of a firm located
in point D could be increased to E without requiring a
higher number of inputs. Therefore, at point D, the firm is
considered inefficient. Similarly, a firm located in point F is
also inefficient because it lies below the performance possibility
frontier curve. However, it is less inefficient than firm located
in point D because its distance from the frontier is smaller.
FIGURE 1: PERFORMANCE FRONTIER USING TWO PERFORMANCE
MEASURES

EVA
C

PERFORMANCE
POSSIBILITY FRONTIER

E
B

D
F

ROA

VI. CONCLUSIONS

Measuring performance is crucial for an organization because


it helps assess achievements and set future strategies to reach
a stable long-term growth path and success. Therefore, the
disagreement on what financial indicators should be used to
measure organizational performance causes some concern.
Our analysis suggests that there is no single dominant
performance measure because each has advantages and
disadvantages and gives a different perception on performance.
Therefore, the use of multiple measures can give a more
complete understanding of an organizations performance
and prospects. In this regard, frontier analysis offers a useful
performance measure. n

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TABLE 1: ACCOUNTING MEASURES OF ORGANIZATIONAL PERFORMANCE


Measure

Description

Studies That Use Measure

Return
on Assets
(ROA)

ROA is an indicator that shows how


profitable a company is relative to its
total assets. A higher ROA suggests that
the company is more profitable with
less investment.

Adner and Helfat (2003); Ahn et al. (2004);


Brush and Bromiley (1997), Crossland
and Hambrick (2007); Dess and Robinson
(1984); Goddard and Wilson (1999);
Hansen and Wernerfelt (1989); Hawawini
et al (2003); Hitt et al (1997); Khanna and
Rivkin (2001); Mackey (2006); Maruyama
and Odagari (2002); Mauri and Michaels
(1998); McGahan and Porter (1997, 1999,
2002); McGahan (1999); McNamara et
al. (2005); Roquebert et al. (1996); Rumelt
(1991); Schmalensee (1950); Short et al
(2007); Stapleton et al. (2002); Teece
(1981); Wasserman et al (2004); Weiner
and Mahoney (1981); Wiggins and Ruelfi
(2002); Wiley (2011)

Return
on Sales
(ROS)

ROS is also known as net profit margin. It


measures a companys pricing strategy
and operating efficiency. A higher
operating margin means that the
company has less financial risk.

Ahn et al. (2004); Crossland and Hambrick


(2007); Lieberson and OConnor (1972);
Thomas (1988); Weiner (1978)

Return
on Equity
(ROE)

The ROE is also known as Return on Net


Worth (RONW). It measures how much
profit a company generates with the
money invested by shareholders. A
higher ROE suggests that the company
is earning more than other firms in the
same industry.

Ahn et al. (2004); Hitt et al. (1997);


Stapleton et al. (2002); Teece (1981)

Return on
investment
(ROI)

ROI compares the investment gain with


the investment costs in an organization.
A high ROI means that investment gains
compare favorably to investment costs.

Dess and Robinson (1984); Jacobsen


(1998)

Return on
capital
employed
(ROCE)

ROCE indicates the efficiency and


profitability of a company's capital
investments.

Devinney et al (2010)

Sales
growth
(SG)

SG is the percentage change of total


sales over a specific period of time.

Ahn et al. (2004); Crossland and Hambrick


(2007); Dess and Robinson (1984);
Reinmann (1982)

TABLE 2: MARKET MEASURES OF ORGANIZATIONAL PERFORMANCE


Measure

Description

Studies That Use Measure

Diluted
earnings
per share
(DEPS)

DEPS is the profit generated per each share of a


companys stock if all convertible securities were
exercised.

Wiley (2011)

Total
shareholder
return (TSR)

TSR allows investors to assess the performance of


stocks over a period of time. It indicates how much
value the company is creating. Unlike the stock
return, TSR considers the value of the dividends that
have been paid.

Ahn et al. (2002); Boston


Consulting Group (2006);
CIMA (2004); Pakes (1985)

Market
share (MS)

Market share is the percentage or proportion of the


total available market or market segment that is
being serviced by a company.

Chang and Singh (2000);


Hansen and Wernerfelt
(1989); Yip et al. (2008)

Sales per
employee
(SpE)

SpE It gives an estimate of how much revenues/


sales are generated per employee. It is used in
Economics to measure a firms efficiency

Richard et al. (2009)

Labor
productivity
(LP)

LP is the amount of goods and services that a


worker produces in a given amount of time. It is
one of several types of productivity that economists
measure. It is also widely used in industrial
organization and foreign direct investment literature.

Aitken and Harrison (1999);


Blomstrom and Persson
(1983); Caves (1974);
Globerman (1979); Guthrie
(2001); Haddad and
Harrison (1993); Kokko (1994)

Labor
productivity
(II)

Patterson et al. (1997) propose the use of a relative


measure of labor productivity that compares a
firms performance to the industrys benchmark.
They define labor productivity as the ratio of sales
over employment in the firm, divided by the ratio of
sales over employment in the entire industry.

Patterson et al. (1997)

TABLE 3: HYBRID MEASURES OF ORGANIZATIONAL PERFORMANCE


Measure

Description

Studies That Use Measure

Tobins q
(Q)

Tobins q is the ratio of the combined market


value divided by the replacement value of
those same assets. A low Q (between 0 and 1)
suggests that a firms stock is undervalued as
the cost to replace a firms assets is greater than
the value of its stock.

Crossland and Hambrick (2007);


McGahan (1999); Short et al.
(2007); Tobin (1969); Wasserman
et al. (2004); Wernerfelt and
Montgomery (1988); Wiggins and
Ruelfi (2002)

Altmans Z
score (Z)

Almans Z-score is a measure of default risk and


bankruptcy propensity. If the Z score is above
2.6 the company is in a safe zone.If the Z
score is between 1.1 and 2.6, the company is
in a grey zone If the Z score is below 1.1 the
company is in a distress zone.

Altman (1968), Short et al. (2007)

Economic
value
added
(EVA)

It is also known as economic profit. A measure


that captures how much value the company is
creating. It measures the real profit the investors
are making after deducting the capital costs.

Biddle et al. (1997); Chandra


(2009); CIMA (2004); Dumitru and
Dumitru (2009); Hawawini et al.
(2003); Kimball (1998); Stern and
Stewart (1996)

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TABLE 4: ACCOUNTING MEASURES AND THEIR CHALLENGES


SCIENTIFIC CRITERIA

NON-SCIENTIFIC CRITERIA

Measurement
complexity

Measurement
time- span

Measurement
benchmarking

Usage

Comparability

Ease

Economic and
investment value

Total Score

Return
on Assets
(ROA)

Medium (2)

Weak (1)

Weak (1)

Strong (3)

Medium (2)

Strong (3)

Weak (1)

13

Return on
Sales (ROS)

Medium (2)

Weak (1)

Weak (1)

Strong (3)

Weak (1)

Strong (3)

Weak (1)

12

Return
on Equity
(ROE)

Medium (2)

Weak (1)

Weak (1)

Medium (2)

Weak (1)

Strong (3)

Weak (1)

11

Return on
investment
(ROI)

Medium (2)

Weak (1)

Weak (1)

Strong (3)

Weak (1)

Medium (2)

Weak (1)

11

Return on
capital
employed
(ROCE)

Medium (2)

Weak (1)

Weak (1)

Weak (1)

Medium (2)

Strong (3)

Weak (1)

11

Sales
growth
(SG)

Medium (2)

Weak (1)

Weak (1)

Weak (1)

Weak (1)

Strong (3)

Weak (1)

10

Note: Numbers reported in parentheses are the scores assigned to each category: 1 for weak, 2 for medium and 3 for strong.

TABLE 5: MARKET MEASURES AND THEIR CHALLENGES


SCIENTIFIC CRITERIA

NON-SCIENTIFIC CRITERIA

Measurement
complexity

Measurement
time- span

Measurement
benchmarking

Usage

Comparability

Ease

Economic and
investment value

Total Score

Diluted
earnings per
share (DEPS)

Medium (2)

Medium (2)

Weak (1)

Weak (1)

Weak (1)

Strong (3)

Medium (2)

12

Total
shareholder
return (TSR)

Medium (2)

Strong (3)

Weak (1)

Medium (2)

Weak (1)

Strong (3)

Medium (2)

14

Market
share (MS)

Medium (2)

Weak (1)

Strong (3)

Medium (2)

Medium (2)

Weak (1)

Strong (3)

14

Sales per
employee
(SpE)

Medium (2)

Weak (1)

Medium (2)

Weak (1)

Weak (1)

Strong (3)

Medium (2)

12

Labor
productivity
(LP)

Medium (2)

Medium (2)

Medium (2)

Medium (2)

Medium (2)

Weak (1)

Medium (2)

13

Note: Numbers reported in parentheses are the scores assigned to each category: 1 for weak, 2 for medium and 3 for strong.

TABLE 6: HYBRID MEASURES AND THEIR CHALLENGES


SCIENTIFIC CRITERIA

NON-SCIENTIFIC CRITERIA

Measurement
complexity

Measurement
time- span

Measurement
benchmarking

Usage

Comparability

Ease

Economic and
investment value

Total Score

Strong (3)

Strong (3)

Strong (3)

Strong (3)

Medium (2)

Weak (1)

Strong (3)

18

Altmans Z
score (Z)

Medium (2)

Strong (3)

Weak (1)

Weak (1)

Medium (2)

Strong (3)

Medium (2)

14

Economic
value
added
(EVA)

Strong (3)

Strong (3)

Medium (2)

Strong (3)

Medium (2)

Weak (1)

Strong (3)

17

Return on
investment
(ROI)

Medium (2)

Weak (1)

Weak (1)

Strong (3)

Weak (1)

Medium (2)

Weak (1)

11

Tobins q
(Q)

Note: Numbers reported in parentheses are the scores assigned to each category: 1 for weak, 2 for medium and 3 for strong.

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TABLE 7: CALCULATION AND DATA SOURCES OF FINANCIAL MEASURES OF PERFORMANCE


Accounting Measures
Measure
Return on
Assets (ROA)

Return on
Sales (ROS)

Return on
Equity (ROE)

Formula

Data source to be used

ROA =
(Net income / Total assets) * 100

Yahoo! Finance and Google Finance both provide the ROA indicator for public companies. We
can also estimate it by ourselves. Net income is taken from the income statement and total
assets is taken from the balance sheet.

ROS =
(Operating income / Sales) * 100
Where operating income, in most of the cases, is
equal to earnings before interest and taxes. It is also
known as operating profit in the UK account system.
ROE = (Net income / Total shareholder equity) * 100
ROI = (Net operating profit /
Netbook value of assets) * 100

Return on
investment
(ROI)

Return on
capital
employed
(ROCE)
Sales growth
(SG)

Where the net book value of assets is equal to the


firms assets less the value of intangibles and total
liabilities. In recent times, net operating profits less
adjusted taxes (NOPLAT) and other adjusted profit
measures is used as the numerator.
ROCE =
(NOPAT / Capital employed) * 100
Where NOPAT is net operating profits after taxes and
capital employed is given by the difference between
total assets and current liabilities.
SG = ((Salest- Salest-1) /Salest-1 ) * 100

Yahoo! Finance and Google Finance both provide the ROS indicator for public companies.
We can also estimate it by ourselves. Operating income and sales are taken from the income
statement.

Yahoo! Finance and Google Finance both provide the ROS indicator for public companies. We
can also estimate it by ourselves. Net income is taken from the income statement and total
shareholder equity is taken from the balance sheet.
Yahoo! Finance and Google Finance both provide the ROI indicator for public companies. We
can also estimate it by ourselves. Net operating profit is taken from the income statement.
Assets, intangible assets and total liabilities are taken from the balance sheet. Yahoo! Finance
and Google Finance both provide the ROI indicator for public companies. We can also estimate
it by ourselves. Net operating profit is taken from the income statement. Assets, intangible
assets and total liabilities are taken from the balance sheet.

Yahoo! Finance and Google Finance both provide the ROCE indicator for public companies.
We can also estimate it by ourselves. NOPAT is taken from the income statement. Total assets
and current liabilities are taken from the balance sheet.

Yahoo! Finance and Google Finance both provide on sales. Sales care taken from the income
statement.
Market Measures

Measure
Diluted
earnings per
share (DEPS)

Formula

Data source to be used

DEPS = (Net income - preferred stock dividends) /


(Weighted average common shares)

Yahoo! Finance and Google Finance both provide the DEPS indicator for public companies. We
can estimate also it by ourselves. Net income is taken from the income statement, dividends
are taken from the cash flow statement and average common shares are taken from the
Yahoo! Finance and Google Finance website.

Total
shareholder
return (TSR)

TSRt = ((SP)t - (SP)t-1 + (Dividends)t) / (SP)t-1

Market share
(MS)

MS = Firm sales in the industry / Total sales in the


industry

Sales per
employee
(SpE)
Labor
productivity
(LP)
Labor
productivity
(LPII)

Where SP is stock price

SpE = Sales / Number of employees


Where sales are also known as revenues
LP = Value added / Number of employees
Where value added is the difference between the
sale price and the production cost
LPII = (Companys sales / Number of employees
in the company) / (Industrys sales / Number of
employees in the industry)

Historical data on stock prices can be obtained from Yahoo! Finance. Data on dividends can be
obtained from the cash flow statement.
Yahoo! Finance and Google finance provide data on firm sales. Data on Industry sales should
be estimated by determining the competitors that operate in this industry.
Yahoo! Finance and Google finance provide data on firm sales. Data on sales (revenues) can
be obtained from the income statement. The number of employees per firms is also available in
Yahoo! Finance.
The number of employees per firms is available in Yahoo! Finance. Data on value added are not
publicly available and we have to estimate it.
Yahoo! Finance and Google Finance both provide the data on total sales. Sales care taken
from the income statement. Data on Industry sales should be estimated by determining the
competitors that operate in this industry.
Hybrid Measures

Measure

Formula

Data source to be used

EVA = NOPAT - CC
Economic
value added
(EVA)

Where NOPAT is net operating profits after tax and is


given by:
NOPAT = EBIT - income tax
CC is capital charged and is given by
CC = Capital Investment * Cost of capital
Capital Investment = Total assets - Current liabilities
Cost of capital = Capital Investment * Cost of capital
Q = Market value / Total assets value

Tobins q (Q)

Where market value is market capitalization (share


price * outstanding shares)

NOPAT is available from the income statement (Earnings before interest and taxes minus taxes).
Data on capital charged are not publicly available and we have to estimate it.

The Tobins q is estimated by http://www.advfn.com. We can also estimate it by taking market


value (market capitalization) from the key statistics from Yahoo! Finance and total assets from
the balance sheet.

Z=1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + .999T5


Almans Z
score (Z)

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T1 = (Current assets - Current liabilities) / Total assets


value
T2 = Retained earnings / Total Assets
T3 = Earnings before interest and taxes / Total Assets
T4 = Market value of equity / Total liabilities
T5 = Sales / Total Assets

Data to calculate the Altmans Z score can be obtained from Yahoo! Finance or Google
Finance. Current assets, current liabilities, total assets value, book value of equity and total
liabilities can be obtained from the balance sheet. Retained earnings can be obtained from
the cash flow statement. Earnings before interest and taxes can be obtained from the income
statement.

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