Corporate financial performance

Corporate performance overall is hard to measure, since there are many perspectives of the subject. Shareholder-, manager- and employee-perspective all differ from one another and therefore good and successful performance varies within a corporation. Corporate perfor-mance can be described as a balance of financial, social and individual commitment to com-mon goals. (Bourne & Bourne 2011, 1-2.) Neely (2002) divided business performance to an accounting perspective, marketing perspective and operations perspective as Cameron and Whetten (1983) explained dimensions of performance measurement as accounting-based measures, financial market measures and non-financial measures.

Cooper (1993) pointed out that the effects of performance measures vary depending on the measure used as different studies point out how the choice and use of performance measures can affect the results of the research (Kirchoff 1977; Venkatraman & Ramanujam 1987; Rob-inson 1998). The measurement of performance demands an explicit definition of the depend-ent variable (Dess & Robinson 1984) and performance should be measured with sustained profitability instead of stock prices or sales (Porter 2001). Murphy, Trailer and Hill (1996) stated that researchers should include multiple different performance dimensions if possible and Chakravarthy (1986) argued that financial data should be complemented with future-ori-ented data to get wider understanding of the actual performance of a corporation. Hawawini, Subramanian and Verdin (2003) examined whether corporate performance is driven by indus-try or firm factors with value-based measures of performance instead of accounting ratios.

They found out that for the performance of industry leaders and losers, firm-factors dominate.

They also argued that value leaders build their success on the understanding of industry to be able to capture most of the industry value. (Hawawini et al 2003.) This indicates that the per-formance is not only measured by the financial ratios but the image and reputation of a firm matters.

Bertonèche and Knight (2001, 3) stated, that the financial statements of a corporation repre-sent their financial performance. Neely (2002, 3-6) claimed that financial performance may be the most important organizational objective and it should be controlled by financial measures such as profit or return on investment. The main objectives of corporate finance are to in-crease the market value and the current price of the shares of the company (Brealey et al.

2014, 1-3). Neely (2002, 5) stated that in addition to cash flow planning, profitability or ac-quiring resources at a greater rate than when using them, is another key area of business.

Financial planning and control are essential in management of business (Neely 2002, 4-5).

While balance sheet reports stocks at a specific moment, income statement and cash flow statement measure the flow of transactions in a wider time period (Bertonèche & Knight 2001, 46). The value of a firm is defined by its recent financial position. Balance sheet con-tains the key financial figures of corporations, such as assets, liabilities, and stockholders’ eq-uity (Bertonèche & Knight 2001, 3-7). Income statement contains sales, net income, taxes, fi-nancial and expenses. Cash flow statement contains cash flow from operations, investments, financial flows and cash. It analyses all transactions in a firm’s bank account and classifies them into operation, investment and financial cash flows. (Bertonèche & Knight 2001, 46-60.) Cash flow planning is necessary as cash should be available to meet any financial obligations (Neely 2002, 5). Commonly, with balance sheet, two years of data is reported as with income statements and cash flow statement, data is reported from three-years-time. (Bertonèche &

Knight 2001, 46-60.)

Corporate financial performance demands clear measurement strategies. Niskavaara (2017, 67) suggested, that corporate financial performance should be measured through three key characteristics: profitability, liquidity and solvency. Profitability measures whether incomes are enough to cover expenses. Liquidity measures whether cash flow is sufficient to cover bills and other fees. Solvency measures if capital structure is healthy and there’s an appropri-ate amount of dept, and not too much. Most of the corporations Key Performance Indicators

(KPIs) are financial indicators. (Niskavaara 2017, 67.) Webb and Schlemmer (2008, 15) claimed that typical accounting-based measures are sales, sales growth and profitability.

As Goel (2015) presented the concept of financial ratios, he divided them into profitability, efficiency, liquidity, solvency and market ratios. Financial ratios enable working with the numbers in corporation’s financial statements, evaluating its business performance, analyzing and forecasting its growth. Profitability ratios evaluate whether a corporation has been effi-cient with expenditures and managing sales and investments. Roughly, profitability ratios are margins (=sales into profits) and returns (=overall efficiency generating return for sharehold-ers) (Goel 2015, 9). Efficiency ratios indicate how effectively a company capitalizes its assets.

Liquidity ratios inform how a corporation meets its short-term financial responsibilities. Sol-vency ratios indicate the firm’s long-term financial reliability and market ratios indicate the market trend and potential growth of business. (Goel 2015.) Based on previous research, the key financial indicators are revenue, sales growth, market share and return on investment (ROI) This study is based on the selected indicators of earlier research and the following indi-cators are applied to this study.

Revenue

Revenue measures the value customers gain while they purchase products or services. Reve-nue is a liquidity ratio and it does not measure company’s profitability. ReveReve-nue is equal to profit + all costs and reductions. (Niskavaara 2017, 86-88.)

Market share

Market share is a percentage of a company’s sales in the industry. It is calculated from com-pany’s sales in a specific time period compared to total sales of the industry in the same time period. Market leaders are those who have the biggest share of the market. (Hayes 2020.)

Sales

Sales are equal to revenue and refers to earnings a company gets from customers as they pur-chase products or services (Niskavaara 2017, 92).

Return on investment (ROI)

Return on investment is one way to examine capital profit margin and it measures corpora-tion’s relative profitability. ROI is calculated as profit / capital. (Niskavaara 2017, 74-75.)