CHAPTER 4 ASSESSMENT OF BUSINESS PERFORMANCE. When we wish to assess the performance of a business, we’re looking for ways to measure the financial and economic consequences of past management decisions that shaped investments, operations, and financing over time. | 9 27 01 11 07 AM Pagy 5 CHAPTER 4 ASSESSMENT OF BUSINESS PERFORMANCE When we wish to assess the performance of a business we re looking for ways to measure the financial and economic consequences of past management decisions that shaped investments operations and financing over time. The important questions to be answered are whether all resources were used effectively whether the profitability of the business met or even exceeded expectations and whether financing choices were made prudently. Shareholder value creation ultimately requires positive results in all these areas which will bring about favorable cash flow patterns exceeding the company s cost of capital. As we ll see there is a wide range of choices among many individual ratios and measures some purely financial and some economic. No one ratio or measure can be considered predominant. In this chapter we ll demonstrate primarily the analysis of business performance based on published financial statements. These represent the most common data source available for the purpose even though they are not designed to reflect economic results and conditions. We ll also discuss the more important measures that help assess economic performance aspects. Our focus will be on key relationships and indicators that allow the analyst to assess past performance and also to project assumed future results as discussed in Chapter 5 . We ll point out their meaning as well as the limitations inherent in them. In the final chapters we ll discuss the larger context of valuing a company or its parts in economic terms a process that is based on an intense assessment of performance drivers and strategic positioning and that requires developing expected cash flow results for which past performance is only a starting point. Ratio Analysis and Performance Because there are so many tools for doing performance assessment we must remember that different techniques address measurement in very specific and often 95 .
