measuring organizational performance

MEASURING ORGANIZATIONAL PERFORMANCE: A BEST PRACTICE GUIDE TO FINANCIAL INDICATORS

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The 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.

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 MEASUREMENTThree 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.

ABOUT KHPIThe Kenexa High Performance Institute (KHPI) features a multidisciplinary team of highly qualified professionals with offices in London and Minneapolis. President Dr. Jack Wiley oversees rigorous, global and innovative research and development programs, spanning all aspects of human capital management. KHPI produces books, academic papers for top journals and practitioner articles. For more information, visit www.khpi.com.

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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 SpanDepending 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.

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 BUSINESSRichard 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 MeasuresWe 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 short- and the long term. This has led to the creation of shareholder-valued 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 non-efficient 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

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 MeasuresRichard 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

1Debt 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 MEASURESAs 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 investment-related 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

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 PERFORMANCEBased 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 differentsome 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.

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)

TABLE 3: HYBRID MEASURES OF ORGANIZATIONAL PERFORMANCE


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 1: ACCOUNTING MEASURES OF ORGANIZATIONAL PERFORMANCE


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 2: MARKET MEASURES OF ORGANIZATIONAL PERFORMANCE

VI. CONCLUSIONSMeasuring 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

FIGURE 1: PERFORMANCE FRONTIER USING TWO PERFORMANCE MEASURES

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SCIENTIFIC CRITERIA NON-SCIENTIFIC CRITERIA

Measurement complexity

Measurement time- span

Measurement benchmarking

Usage Comparability EaseEconomic and

investment valueTotal Score


Medium (2) Weak (1) Weak (1) Strong (3) Medium (2) Strong (3) Weak (1) 13


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


Medium (2) Weak (1) Weak (1) Strong (3) Weak (1) Medium (2) Weak (1) 11


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

TABLE 4: ACCOUNTING MEASURES AND THEIR CHALLENGES

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








Medium (2) Medium (2) Weak (1) Weak (1) Weak (1) Strong (3) Medium (2) 12


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


Medium (2) Weak (1) Medium (2) Weak (1) Weak (1) Strong (3) Medium (2) 12


Medium (2) Medium (2) Medium (2) Medium (2) Medium (2) Weak (1) Medium (2) 13

TABLE 5: MARKET MEASURES AND THEIR CHALLENGES







Tobins q (Q)

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


Strong (3) Strong (3) Medium (2) Strong (3) Medium (2) Weak (1) Strong (3) 17


Medium (2) Weak (1) Weak (1) Strong (3) Weak (1) Medium (2) Weak (1) 11

TABLE 6: HYBRID MEASURES AND THEIR CHALLENGES





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Accounting Measures

Measure 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.

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.

Return on Equity (ROE) ROE = (Net income / Total shareholder equity) * 100

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.


ROI = (Net operating profit / Netbook value of assets) * 100

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.

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.


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.

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.

Sales growth (SG) SG = ((Salest- Salest-1) /Salest-1 ) * 100

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

Market Measures



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.


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

Where SP is stock price

Historical data on stock prices can be obtained from Yahoo! Finance. Data on dividends can be obtained from the cash flow statement.

Market share (MS)

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

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.


SpE = Sales / Number of employees

Where sales are also known as revenues

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.


LP = Value added / Number of employees

Where value added is the difference between the sale price and the production cost

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.

Labor productivity (LPII)

LPII = (Companys sales / Number of employees in the company) / (Industrys sales / Number of

employees in the industry)

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



EVA = NOPAT - CC

Where NOPAT is net operating profits after tax and is given by:

NOPAT = EBIT - income taxCC is capital charged and is given by

CC = Capital Investment * Cost of capitalCapital Investment = Total assets - Current liabilities

Cost of capital = Capital Investment * Cost of capital

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.

Tobins q (Q)

Q = Market value / Total assets value

Where market value is market capitalization (share price * outstanding shares)

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.

Almans Z score (Z)

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

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

T2 = Retained earnings / Total AssetsT3 = Earnings before interest and taxes / Total Assets

T4 = Market value of equity / Total liabilitiesT5 = 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.

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



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