Academic journal article UTMS Journal of Economics

Back to the Core: Alternative Performance Measurement 1

Academic journal article UTMS Journal of Economics

Back to the Core: Alternative Performance Measurement 1

Article excerpt

(ProQuest: ... denotes formulae omitted.)


Organizational performance is one of the most important constructs in management research (Richard et al. 2009). Richard et al. (2009) in addition categorize performance measures in three main categories (accounting measures, financial market measures and mixed market/accounting measures).

Accounting measures by Richard et al. (2009) are: Cash flow from operations, Earnings before interest and taxes (EBIT); Earnings before interest, taxes, depreciation and amortization (EBITDA); Net operating profits (also termed earnings); Net operating profit less adjusted taxes (NOPLAT) also referred to as Net operating profit after tax (NOPAT) Return on assets (ROA); Return on capital employed (ROCE) and also known simply as return on capital (ROC); Return on equity (ROE); Return on investment (ROI); Return on invested capital (ROIC); Return on net assets (RONA); Return on Sales (ROS); Return on total assets; Risk-adjusted return on capital (RAROC) this is also known as return on risk adjusted capital (RORAC); Sales; Sales Growth; Variance in accounting profitability.

Term financial market measure stands for (Richard et al. 2009): Beta coefficient; Earnings per share (EPS); Jensen's alpha; Market value (or market capitalization); Priceto-earnings ratio (P/E ratio); Stock price; Total shareholder return (TSR); Tracking stocks.

Mixed market/accounting measures are (Richard et al. 2009): Balanced scorecard; Cash flow per share; Cash flow return on investment (CFROI); Cash value added (CVA); Discounted cash flows (DCF); Economic Value Added (EVA) the generic name for this is economic profit; Free cash flows; Internal rate of return (IRR); Market-to-book value; Market value added (MVA); Net present value (NPV); Shareholder value analysis (SVA); Tobin's Q; Total business return (TBR); Warranted equity value (WEV); Weighted average cost of capital (WACC); Z-score.

APMs such as EBIT, EBITDA and all mentioned before, being common practice for entities to present, but usefulness of APMs is currently the focus of much debate in the world3. In multiple communications, these alternative profit numbers may appear, including corporate media releases and analyst briefings. APMs are often described in terms that are not defined by issuers of accounting standards or included in professional literature and are therefore not readily recognizable by users of financial statements.

Since all before mentioned ratios are derived from the financial statements, any weakness in the original financial statements will also creep in the derived analysis based on financial statement numbers. Thus, the limitations of financial statements also form the limitations of the ratio analysis. Hence, to interpret the ratios, the user should be aware of the rules followed in the preparation of financial statements and also their nature and limitations (Kumar 2015).

The limitations of ratio analysis which arise primarily from the nature of financial statements by Kumar (2015) are as under:

* Limitations of Accounting Data;

* Ignores Price-level Changes;

* Ignore Qualitative or Non-Monetary Aspects;

* Variations in Accounting Practices;

* Forecasting.

Therefore, the quality of APMs can be determined by determining the quality of the financial statements. The aim of this paper is to identify methods that test the quality of financial statements and to suggest ways to determine the quality of financial statements, thereby increasing the applicability of APMs.

Methodologically, the paper is designed as a literature review in the field of models for determining accounting conservatism, and therefore the first part of the paper defines and describes the term accounting conservatism, and the second part gives an overview of models that determine accounting conservatism in the literature. Finally, the final section of the paper provides concluding considerations on models for identifying biases in financial reporting and their possible application with APMs. …

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