Financial Performance Criteria

Financial Performance Criteria

Since long ago, many studies have been conducted to achieve a suitable criterion for evaluating the performance of companies and managers in order to ensure that the company's movement is aligned with the interests of actual investors and a basis for making economic decisions for potential investors and creditors. The results of these studies have led to the presentation of four approaches to performance criteria as follows:

1- Accounting approach: In this approach, figures included in financial statements such as profit, earnings per share, operating cash flows, return on assets and return on equity are used to evaluate performance.

2- Economic approach: Based on this approach, which uses economic concepts, the performance of the business unit is evaluated with emphasis on the profitability of the company's assets and with regard to the rate of return and the cost of capital used. Economic value added, adjusted economic value added and market value added are included in this group.

3- Combined approach: In this approach, a combination of accounting and market information is used to evaluate performance, such as the Q-Tobin ratio and the price-to-earnings ratio (P/E).

4- Financial management approach: According to this approach, financial management theories such as the capital pricing model and the concepts of risk and return are often used. The main emphasis of this approach is on determining the excess return per share.