Transforming Corporate Performance: Measuring and Managing the Drivers of Business Success

By Michael A. Milgate | Go to book overview

9
Trends and Practices in
Financial Measurement

A QUESTION OF VALUE

Key Questions and Issues

What is the Coca-Cola trademark worth? The 115-year-old brand grew by 6 percent in 1995, and the corporation estimated its worth at US$39 billion for that year, which is equivalent to about 42 percent of the organization's entire market value. Yet in accounting terms, it is worth precisely US$1. This point indicates two extremes of contemporary financial measurement. The first, for many businesses, is solely through traditional reporting systems, measuring after the fact performance, operating margins, cash flows, return on investments, dividends, and so on. For investors in public organizations, price/earnings ratios, dividend yield, and ratios of share price to sales or book value are key measures to determine whether a stock is worth buying. These factors link a share price to some aspect of financial performance.

The second, more emergent extreme, is analyzing value creation. This is primarily done by shareholders but also, in some cases, other stakeholder constituents, such as employees, suppliers, and customers. Traditional valuation methods include book value and enterprise value, that is, market capitalization plus debt, though an approach gaining credibility is economic value added (EVA). In short, EVA measures the extent to which business activities earn more than the cost of capital to create, or conversely, destroy, value.

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