Financial Performance Measures: A Back-to-Basics Approach

Abstract

This paper reviews financial performance measures and revisits the theory of finance because it provides a foundation that helps to understand the relationships among these measures. We examine these measures in both a single-period and multi-period world. In a single-period world, we conclude that measures originate from the same economic model of investment and production theory of a firm, and therefore are related to each other. These relationships hold in the multi-period world under the commonly known assumption of growth and the use of the popular valuation model. No single measure is fully adequate for measuring financial performance. Thus, we recommend using multiple measures to provide a fuller picture of a firm’s performance. javascript:void(0);

Keywords: ROIC, EVA, MVA, NPV, FCF, return on investment, economic value added, market value added, free cash flow, net present value

JEL Classification: A1