EVALUATING FIRM PERFORMANCE: TWO APPROCHES

 Financial Ratio Analysis

-identifies how a firm is performing according to its balance sheet,
income statement, and market valuation.
- it is a method of evaluating company’s performance and financial
well-being through ratios of accounting values, including short-term
solvency, long-term solvency, asset utilization, profitability, and
market value ratios.
- or in simple term, it a method of comparing two financial data from
a company’s financial statements and compare it with different
companies that results a helpful decision making for investment by
shareholders of the company.
Why is it important?
1. Analysis of Financial Statements
Interpretation of the financial statements and data is
essential for all internal and external stakeholders of the firm.
With the help of ratio analysis, we interpret the numbers from
the balance sheet and income statements.
2. Helps in understanding the profitability of the company
help to determine how profitable a firm is
3. Analysis of Operational Efficiency of the Firms
4. Liquidity of the Firms
5. Helps in Identifying the Business Risks of the Firm
6. Helps in Identifying the Financial Risks of the Company
7. For Planning and Future Forecasting of the Firm
8. To Compare the Performance of the Firms
 Stakeholder View
- Satisfying a broad range of stakeholders, including employees,
customers, and owners to ensure their long-term viability.

FINANCIAL RATIO ANALYSIS

 Short-term Solvency or Liquidity

Liquidity refers to both an enterprise's ability to pay short-

term bills and debts and a company's capability to sell assets
quickly to raise cash. In laymans term, Liquidity ratios
 measure a company's ability to convert its assets into
cash.

Solvency measures a company's ability to meet its financial

obligations. (Short-term)

- Ex. Current Ratio, Quick Ratio, Cash Ratio and etc.

 Long-term Solvency measures

Solvency refers to a company's ability to meet long-term

debts and continue operating into the future.

- Ex. Debt Ratio, Debt-to Equity Ratio, Equity

Multiplier and etc.

 Asset Management (Turnover)

Analysis of asset management ratios tells how efficiently
and effectively a company is using its assets in the
generation of revenues. They indicate the ability of a
company to translate its assets into the sales. 
- Ex. Inventory turnover, receivable turnover, total
asset turnover and etc.
 Profitability
Used to evaluate the company’s ability to generate income
as compared to its expenses and other cost associated with
the generation of income during a particular period.
- Ex. Profit Margin, Return on Asset, Return on Equity
and Etc.
 Market Value
used to evaluate the current share price of a publicly-held
company's stock. These ratios are employed by current
and potential investors to determine whether a company's
shares are over-priced or underpriced.
- Ex. Price earnings ratio, Market to book ratio and etc.
Assessing the firm’s performance is also more useful if it is evaluated in terms of how it changes over
time, compares with industry norms, and compares with key competitors.:

Historical Comparisons When you evaluate a firm’s financial performance, it is very useful to compare
its financial position over time.

Comparison with Industry Norms When you are evaluating a firm’s financial performance, remember
also to compare it with industry norms. A firm’s current ratio or profitability may appear impressive at
first glance. However, it may pale when compared with industry standards or norms.

Comparison with Key Competitors. you can gain valuable insights into a firm’s financial and competitive
position if you make comparisons between a firm and its most direct rivals.

STAKEHOLDER VIEW/PERSPECTIVE
 BALANCE SCORECARDS
 A type of evaluating firms performance that includes
yung mga financial measures that reflect the results of
yung actions na already taken, pero from the
indicators with measures sa customer satisfaction,
internal processes, and the organization’s innovation and
improvement activities— operational measures that drive
future financial performance.
 Dito kasi yung organizations can use this method to clarify their
vision and strategy and transform them into action.
 In simple terms, the word balance implies that it takes a
balanced and well-rounded approach to measuring firms
performance, on the other hand, scorecard implies that you are
trying to score something against standards. Thus balance
scorecard is implying about achieving a balance across various
measures that are used in business and basically plotting it in a
scorecard.
 Yung theory kasi ng balance scorecards is inaargue
niya yung nakasanayan na approach in evaluating the
firms performance is naka.focus lng siya sa financial
information or aspect, and yung info na yung business
is doing financially well, but in reality it is not good,
because yung financial gains can be short-term so
yung financial performance can only look good in the
short run if theres other aspect that are not fulfilled,
but in the long-run the financial performance will
suffer if yung other aspect is hndi pinansin.
 Yung scorecard is ina.align niya yung business
activities sa vision ng business, and monitor business
performance against strategic goals. Also, it considers
 the financial and non-financial aspect as equally
important.
 Strengths==
 Gives a real and complete view of business
performance since it covers the financial and
non-financial information.
 It is relevant not just for financial stakeholders
 And, encourages long-term strategies.
 Weaknesses==
 Needs to be updated thoroughly on a regular
basis in order to stay relevant. Otherwise it is
not relevant
o For example, customer satisfaction can
be be high or low depende sa peak-and
off-paek cycles as well, for instance if
you’re delivering a lot of orders in
Christmas season, tpos you messed a
few order which result to affect yung
customer satisfaction ratings.
 Very difficult to balance all perspectives
o Kasi there’s always problem na
maencounter.
 Lots of resources needed to measure a vast
amount of data.
o FOUR PERSPECTIVES OF BALANCE SCORECARD
 Customer Perspective
 Top Priority for management
 How do customers see us?
 it indicate how well firms are satisfying customers’
expectations.
 goals for four key categories of customer concerns:
time, quality, performance and service, and cost.
 To achieve our vision, how should our customers see
us?
 Sample answer: we need to show the market that our
products have superior quality compared to the
competition.
How to measure it? Through customer satisfaction
surveys.
 KPI- Customer satisfaction and customer retention
o It is very important to understand if customer
are satisfied with the products and services
 provided by the business and that also ties
with customer retention.
 Internal Business Perspective
 The KPI here is the inventory, quality control,
and product lead time. On how the business
efficiently and effectively manage the
inventory, if theres a good level of quality
control, and how yung product lead times, if
naga-take ba sya ng too much time to bring a
product from a concept to reality and also if
yung time matagal bah ang pagdeliver ng
product sa customer.
 Innovation and Learning Perspective
 Why is it important to employees to learn and
grow, obviously if yung employees skills are
lacking then they’re not going to be able to
match-up with competitors in the business,
they’ll not be able to stand-up and deliver on a
consistent basis, so, the KPI’s in this part is the
employee skills, training, retention, and
satisfaction
 Financial Perspective
 Though the balance scorecard is trying to get
the balance but not neglecting the financial
perspective.
 Key performance indicators here is the
revenue, expenses, ROI, and Net Income in
order to gauge financial performance.