The profitability financial ratios ROI, ROA, ROS and ROE in most companies are used as a measure of financial performance – for both internal and external use. They are easy to calculate and suitable for benchmarking processes in different sectors. Financial ratios are utilized in managerial feedback processes to compare forecasted results and real values. In this case financial ratios need to be in combination with other measures, particularly if we drill down the management control at the function, process or activity levels. For performance monitoring, managerial compensation, strategic and process management and financial ratios considered alone seem to be inadequate [Bryde, 2005]. Financial ratios are too general; they are too far from the activity and the key drivers of the business and they depend too much on the financial accounting process (which, whatever the case, is never quick enough). Key performance indicators (KPIs) are internal measures, relevant for monitoring performance, both at top and bottom levels. Contrary to financial ratios, KPIs are not strictly codified by the literature and companies may develop their own indicators. KPIs are linked to management performance at different levels, in different processes and activities and with various users [Walsh P., 1996]. Some KPIs are generic, valid for all companies or for those that belong to a particular sector or activity; other KPIs are specific to a single company or for a certain process. KPIs may be used in benchmarking processes, for comparing results over time and for comparing companies. KPIs are often linked to critical successful factors (CSF) and to business strategy, being part of the strategic control of an organization. [Adams S., 2013]. In some business sectors KPIs had a sort of old predecessor, like the cost/income ratio or the cost per Km value in the railway companies of the late 1800s. Those measures were designed for top level managerial control but were also used for strategic planning as real top level KPIs. Railways, insurance companies, airline companies, large-scale retail channels, mobile phone operators and online travel agencies manage the business by controlling one or more sector related KPIs (i.e., the cost for train/Km, the load factor, sales per square meter, etc). Those sector KPIs are a measure of internal performance and can be used for managerial control and benchmarking processes. Financial ratios and sector KPIs: Are they two faces of the same coin [Ganna D., 2011]? Do they reveal a different position in a hypothetical “best in class” analysis? Can we identify a link or a sort of prediction between those KPIs and profitability financial ratios? To answer this research question, some companies operating in the Italian market with “historical” sector KPIs have been identified and analysed. We have calculated profitability financial ratios (and a specific one called ROI* dividing EBIT by total assets) and also sector KPIs. Activities finally considered were railways, mobile phone operators and distribution channels. From our analysis of the years 2011, 2012 and 2013, we found a significant correlation between the position of each company in the financial ratios and in the sector KPIs tables. The companies in top positions in sector KPIs were also those companies that had better financial ratios. The correlation was statistically proved each year separately and also year by year. This occurred even if the selected KPIs had general formulation and did not consider all the aspects of the business. In the selected case studies, the financial ratios considered and the sector KPIs were two faces of the same coin in the medium term view.

Financial ratios and sector KPIs: are they two faces of the same coin? Evidence from a few selected companies in the italian context

ROFFIA, Paolo
2015

Abstract

The profitability financial ratios ROI, ROA, ROS and ROE in most companies are used as a measure of financial performance – for both internal and external use. They are easy to calculate and suitable for benchmarking processes in different sectors. Financial ratios are utilized in managerial feedback processes to compare forecasted results and real values. In this case financial ratios need to be in combination with other measures, particularly if we drill down the management control at the function, process or activity levels. For performance monitoring, managerial compensation, strategic and process management and financial ratios considered alone seem to be inadequate [Bryde, 2005]. Financial ratios are too general; they are too far from the activity and the key drivers of the business and they depend too much on the financial accounting process (which, whatever the case, is never quick enough). Key performance indicators (KPIs) are internal measures, relevant for monitoring performance, both at top and bottom levels. Contrary to financial ratios, KPIs are not strictly codified by the literature and companies may develop their own indicators. KPIs are linked to management performance at different levels, in different processes and activities and with various users [Walsh P., 1996]. Some KPIs are generic, valid for all companies or for those that belong to a particular sector or activity; other KPIs are specific to a single company or for a certain process. KPIs may be used in benchmarking processes, for comparing results over time and for comparing companies. KPIs are often linked to critical successful factors (CSF) and to business strategy, being part of the strategic control of an organization. [Adams S., 2013]. In some business sectors KPIs had a sort of old predecessor, like the cost/income ratio or the cost per Km value in the railway companies of the late 1800s. Those measures were designed for top level managerial control but were also used for strategic planning as real top level KPIs. Railways, insurance companies, airline companies, large-scale retail channels, mobile phone operators and online travel agencies manage the business by controlling one or more sector related KPIs (i.e., the cost for train/Km, the load factor, sales per square meter, etc). Those sector KPIs are a measure of internal performance and can be used for managerial control and benchmarking processes. Financial ratios and sector KPIs: Are they two faces of the same coin [Ganna D., 2011]? Do they reveal a different position in a hypothetical “best in class” analysis? Can we identify a link or a sort of prediction between those KPIs and profitability financial ratios? To answer this research question, some companies operating in the Italian market with “historical” sector KPIs have been identified and analysed. We have calculated profitability financial ratios (and a specific one called ROI* dividing EBIT by total assets) and also sector KPIs. Activities finally considered were railways, mobile phone operators and distribution channels. From our analysis of the years 2011, 2012 and 2013, we found a significant correlation between the position of each company in the financial ratios and in the sector KPIs tables. The companies in top positions in sector KPIs were also those companies that had better financial ratios. The correlation was statistically proved each year separately and also year by year. This occurred even if the selected KPIs had general formulation and did not consider all the aspects of the business. In the selected case studies, the financial ratios considered and the sector KPIs were two faces of the same coin in the medium term view.
978-9963-711-37-6
KPI, financial performance, performance management
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11562/930636
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