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. 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. 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. 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: 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 Equity (ROE) Return On Assets (ROA) Return On Assets (ROA) Current Ratio Current Ratio Quick Ratio Quick Ratio Cash Ratio Cash Ratio Inventory Turnover Inventory Turnover Profit Margin Profit Margin Return On Investment (ROI) 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. 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. 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. 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 Ratio = Current assets Current liabilities Quick Ratio = Current Assets-Inventory 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. 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. ROA- is a measure of profit per dollar of assets.

Profitability Ratios ROE = Net income ROE = Net income Total equity ROA = Net income ROA = Net income Total assets

Controversy 1. There are many ways to computing these financial ratios and sometimes are computed differently to make the company appeal better to investors. 2. 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 Delivery time Quality Quality Feedback and customer satisfaction Feedback and customer satisfaction Post-sales support Post-sales support New product introductions New product introductions Order fulfillment times Order fulfillment times Marketing approach Marketing approach

Example: 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 = Inventory turnover = Quick ratio = 1.98 Quick ratio = 1.98 Current ratio = 2.18 Current ratio = 2.18 All figures were reported in the company’s 2005 annual report.

Example: 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 = % Profit Margin = % Inventory Turnover = 9.32 Inventory Turnover = 9.32 Current Ratio =.84 Current Ratio =.84 All figures where reported in the company’s 2005 Annual Report

Questions ?