Performance Measures: Lagging Indicators

By: Jeff Koch Todd Devenburgh Kate McDermott

Lagging Indicators

 A lagging indicator follows a series of events. It shows the final results of what already occurred.  Most financial statements are a lagging indicator because it reports where a company has been and trends throughout its history.

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

Reasons?

 Internal: – Manager evaluations – Manager compensation – Division comparison – Historical data  External: – Short-term creditors – Long-term creditors – Investors – Suppliers – Credit rating – Competitors evaluation

Financial Ratios

 Return On Equity (ROE)  Return On Assets (ROA)  Current Ratio  Quick Ratio  Cash Ratio  Inventory Turnover  Profit Margin  Return On Investment (ROI)

ROI

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

Short-Term Ratios

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

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

Short-Term Ratios

 Current Ratio = Current assets Current liabilities  Quick Ratio = Current Assets-Inventory Current liabilities

Profitability Ratios

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

 ROA- is a measure of profit per dollar of assets.

Profitability Ratios

 ROE = Net income Total equity  ROA = Net income Total assets

Controversy

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

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

Non-Financial Measures

 Delivery time  Quality  Feedback and customer satisfaction  Post-sales support  New product introductions  Order fulfillment times  Marketing approach

Example: Motorola

 ROA = 2.02 (avg. over 5 years)  ROE = 4.90 (avg. over 5 years)  Inventory turnover = 11.39

 Quick ratio = 1.98

 Current ratio = 2.18

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

Example: Verizon

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

 Current Ratio = .84

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

Questions