Performance Measures in This Text, I Concern

Performance Measures

In this text, I concern myself with performance measurement. In addition to a performance measure of my choice, some of the other performance measures I will discuss include EVA, ROI, and operating leverage. In so doing, I will not only compute the said performance measures but also reflect on their advantages and disadvantages. My companies of choice for this discussion are Apple Inc. And Google Inc.

Performance Measures: Computations

Formula

Apple

Google

Degree of Operating Leverage

% Change in EBIT/

%Change in Sales

Return on Investment

Operating Profit / Total Assets

Economic Value Added

NOPAT -- (WACC * Investment)

Gross Profit Margin

Sales -- COGS / Sales

Degree of Operating Leverage (DOL)

Operating leverage in the words of Stickney and Weil (2007) "refers to the tendency of net income to rise at a faster rate than sales in the presence of fixed costs" (p. 792). In that regard therefore, a business with a DOL that happens to be high could be more risky than a business with a lower DOL. The earnings before interest and taxes in the case of Apple could therefore be largely unpredictable.

Return on Investment (ROI)

ROI as Albrecht, Stice, Stice, and Swain (2010) point out is essentially "a measure of how much has been earned on the assets of a company" (p. 964). As the authors further point out, this performance measure is computed by dividing the operating profit with total assets. From the table above, it is clear that in comparison to Google, Apple raked in more earnings from its engagements relative to the amount of money it had invested.

Economic Value Added (EVA)

EVA according to Maher, Stickney, and Weil (2007) is "the amount of earnings generated above the cost of funds invested to generate those earnings" (p. 407). Both companies in this case have positive EVA. This means that both companies covered their cost of capital. It is however important to note that Apple appears to have made more profits than Google over and above what was required to cover its costs of doing business.

Gross Profit Margin

An important measure of performance, the gross profit margin is basically an indicator of how much a business actually keeps out of every dollar in rakes in as sales. This to me is an important performance indicator as it demonstrates how effective a given firm is when it comes to the control of costs. A high profit margin would in this case therefore be more desirable. From the table above, Google has a higher gross profit margin than Apple. The management of the latter company may deem it fit to adopt better cost control measures.