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BE353 - Financial performance measures ROI vs RI vs EVA questions with answers.
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BE353 - Financial performancemeasures ROI vs RI vs EVA questions
with answers.
Performance management: measures ANS -- Can't have too few nor too many metrics
- Financial measures: sales, EBITDA, cash flow, variable costs, fixed costs, contribution margins, earnings
per share, return on capital employed, return on equity
- Non-financial measures: customer satisfaction, churn rate, employee satisfaction, CO2 emissions,
productivity, delivery precision, sick days, training days
- A decision has to be made about what measures: 1 to follow up regularly 2 to include in a performance
report 3 to use a basis for performance evaluation
Two types of performance measures ANS -- Lagging measures
- Leading measures
Lagging measures ANS -- How have we performed in the past?
- Historical: focus on what has happened
- Examples: financial measures such as ROCE
Leading measures ANS -- How will we perform moving forward? Leading to financial performance
- Indications for the future
- Example: non-financial measures such as on-time delivery, number of development projects,
reductions of CO2 emissions
Triple bottom line ANS -
Allocation of responsibility contingent on... ANS -- Measurement of input - output
- Understanding of causality (cause and effect) between input - output
- Decision possibility of accountable individual
, - Motivational factors related to individual
The purpose of relating profit to assets employed ANS -- To provide information that is useful in
decision-making about assets employed
- To motivate managers to make appropriate (i.e. goal congruent) decisions
- To measure the performance of the business unit as an economic entity
Relating profit to assets employed ANS -- Are the profits of current operations adequate, given the
resources at the disposal of the BU?
- Can future investment in additional resources be justified by an adequate return?
Three ways of relating profit to assets employed ANS -- ROI
- RI
- EVA
ROI ANS -Ratio = profit/capital
which specific profit and capital depends on controllability principle
RI ANS -residual income
monetary (absolute) amount
profit - cost of capital * capital
EVA ANS -economic value added
adjusted numbers
monetary (absolute) amount
adjusted profit - cost of capital after tax * adjusted capital
Return on equity ANS -ROE = net profit/equity
- Useful for investors evaluating the profitability of an entire company
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