Performance Measures:Performance Measures:Lagging IndicatorsLagging Indicators

By: Jeff KochBy: Jeff Koch

Todd DevenburghTodd Devenburgh

Kate McDermottKate McDermott

Lagging IndicatorsLagging Indicators

A lagging indicator follows a series of A lagging indicator follows a series of events. It shows the final results of what events. It shows the final results of what already occurred. already occurred.

Most financial statements are a lagging Most financial statements are a lagging indicator because it reports where a indicator because it reports where a company has been and trends throughout its company has been and trends throughout its history.history.

Using Financial Ratios As IndicatorsUsing Financial Ratios As Indicators

Through using ratios it eliminates any Through using ratios it eliminates any problems in comparing companies due to problems in comparing companies due to the company size and complexity. All the company size and complexity. All ratios divide out the same in any ratios divide out the same in any corporation leaving only percentages, corporation leaving only percentages, multiples, or times. Some may seem multiples, or times. Some may seem illogical and impractical, but are for illogical and impractical, but are for comparative reasons only. comparative reasons only.

Reasons?Reasons?

Internal:Internal:– Manager evaluationsManager evaluations

– Manager compensationManager compensation

– Division comparisonDivision comparison

– Historical dataHistorical data

External:External:– Short-term creditorsShort-term creditors

– Long-term creditorsLong-term creditors

– InvestorsInvestors

– SuppliersSuppliers

– Credit ratingCredit rating

– Competitors evaluationCompetitors evaluation

Financial RatiosFinancial Ratios

Return On Equity (ROE)Return On Equity (ROE) Return On Assets (ROA)Return On Assets (ROA) Current RatioCurrent Ratio Quick RatioQuick Ratio Cash RatioCash Ratio Inventory TurnoverInventory Turnover Profit MarginProfit Margin Return On Investment (ROI)Return On Investment (ROI)

ROIROI

Return on InvestmentReturn on Investment- Used to evaluate the - Used to evaluate the efficiency of the investment. It is often efficiency of the investment. It is often used to determine how well the company is used to determine how well the company is managed.managed.

Short-Term RatiosShort-Term Ratios

Current RatioCurrent Ratio- best known and most widely - best known and most widely used ratio. It shows the liquidity of the used ratio. It shows the liquidity of the firm.firm.

Quick RatioQuick Ratio- uses the same concept as the - uses the same concept as the current ratio, but omits inventory to show a current ratio, but omits inventory to show a more accurate financial performance.more accurate financial performance.

Short-Term RatiosShort-Term Ratios

Current Ratio = Current Ratio = Current assetsCurrent assets

Current liabilitiesCurrent liabilities

Quick Ratio = Quick Ratio = Current Assets-InventoryCurrent Assets-InventoryCurrent liabilitiesCurrent liabilities

Profitability RatiosProfitability Ratios

ROEROE- defines how much money the - defines how much money the company returns to the stock holders for company returns to the stock holders for every dollar in equity.every dollar in equity.

ROAROA- is a measure of profit per dollar of - is a measure of profit per dollar of assets.assets.

Profitability RatiosProfitability Ratios

ROE = ROE = Net incomeNet incomeTotal equityTotal equity

ROA = ROA = Net incomeNet incomeTotal assetsTotal assets

ControversyControversy

1.1. There are many ways to computing these There are many ways to computing these financial ratios and sometimes are financial ratios and sometimes are computed differently to make the computed differently to make the company appeal better to investors.company appeal better to investors.

2.2. It is previous information about the It is previous information about the company and does not show current company and does not show current changes or trends in the economy or changes or trends in the economy or company.company.

Non-Financial MeasuresNon-Financial Measures

Delivery timeDelivery time QualityQuality Feedback and customer satisfactionFeedback and customer satisfaction Post-sales supportPost-sales support New product introductionsNew product introductions Order fulfillment timesOrder fulfillment times Marketing approachMarketing approach

Example: MotorolaExample: Motorola

ROA = 2.02 (avg. over 5 years)ROA = 2.02 (avg. over 5 years) ROE = 4.90 (avg. over 5 years)ROE = 4.90 (avg. over 5 years) Inventory turnover = 11.39Inventory turnover = 11.39 Quick ratio = 1.98Quick ratio = 1.98 Current ratio = 2.18Current ratio = 2.18

All figures were reported in the company’s 2005 annual report.All figures were reported in the company’s 2005 annual report.

Example: VerizonExample: Verizon

ROA = 4.72 % (avg. over 5 years)ROA = 4.72 % (avg. over 5 years) Gross Margin = 67.5 % Gross Margin = 67.5 % Profit Margin = 10.99 %Profit Margin = 10.99 % Inventory Turnover = 9.32Inventory Turnover = 9.32 Current Ratio = .84Current Ratio = .84

All figures where reported in the company’s 2005 Annual All figures where reported in the company’s 2005 Annual ReportReport

QuestionsQuestions

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