In companies, we often talk about financial performance – at company and business unit level. But what do we actually mean by financial performance and how do we measure it? The answer is often ‘it depends’ because companies may choose to focus on different measures depending on the specific challenges and priorities that they face.
However, an awareness of the broad range of financial performance measures and metrics is critical for any reward professional.
In this session, Alex Edmans, Professor of Finance at London Business School shared a critical understanding of the most important financial performance metrics and considered the strengths and weaknesses of each measure in different business contexts, their use by investment analysts and their deployment in acquisition models. He also looked at how and when these measures should be incorporated into specific performance and reward interventions.
The measures examined included:
- Total Shareholder Return (TSR) – (both relative and absolute)
- Earnings Before Interest, Tax, Depreciation & Amortisation (EBITDA)
- Definitions of ‘Profit’: PBT / PAT / PBIT / Adjusted Operating Profit
- Return on Capital Employed (ROCE)
- Economic Value Added (EVA) and Economic Profit (EP).
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