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What's Wrong With Your Favorite Metric

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What do we mean by metric?

We use metrics as standards against which to judge individual projects, employee teams, and entire companies. This site helps you judge the metrics themselves. To do so--i.e., to say "what's wrong with it"--depends on how the metric is used. Companies use metrics for many things, but all of them come down to three basic purposes:

Managers develop strategies and plans with the anticipated result of value creation. In that forward-looking context, they use measures that are proxies for value, or that provide leading indicators of value in contemplating alternative paths. Per the strategy, or as opportunities arise, management proposes or implements specific projects with eye toward their expected value. If significant capital is involved, they might consider its return on investment or net present value. Once the investments are made and plans executed, we can see the actual results that have materialized (or not). These results should be good enough proxies for value that they can be safely maximized over any meaningful period.

In this program, we are concerned about metrics that are proxies for value for the whole company. These would be the high-level results that owners ultimately care about, to which they are likely to tie management rewards via their variable compensation plans, and that management would ultimately feed back into everything else it is doing.

So, in looking at your company performance, how well does your favorite metric stack up?

Your Favorite Metric:

Sales/Revenue

EBITDA/EBIT

Net Income

Earnings Per Share

Free Cash Flow

Economic Profit/EVA

Return on Capital/Assets

Return On Equity

Net Asset Value

Net Present Value

TSR

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What about non-financial metrics?

OK, no single measure is perfect. What about multiple metrics?

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© 2015 by Hodak Value Advisors.