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1.9 Definition of a Metric

A metric is a standard measure to assess performance in a particular activity. A metric is a composite of measures that yield systematic insight into the state of the process or products and drives appropriate action. Metrics can be composed of both objective data such as historical data reported in a database and subjective data such as expert opinions by senior management or experts in the business.

Metrics are important for a number of reasons. You can use them to defend and justify decisions, to provide objective assessment of progress toward goals, and for problem solving and to validate process improvement. Successful enterprises constantly assess themselves and improve in all dimensions of their enterprise. Metrics provide a foundation for the assessment of success of an activity or enterprise.

A good metric is built upon an organization's missions, goals, and objectives. A metric must be meaningful and understandable for management and workers alike. The best metrics derive naturally from the process in which the data is relevant to the process and its collection becomes part of the process. The metric itself must be easily measurable. The requirement for new systems and data to implement a metric should be minimal because if not, data will not be gathered to support it.

Suppose you have established a corporate objective to improve the company's financial position. Following are metrics you can use to support that objective.

Improve the Company's Financial Position

  • EBIT/EBITDA—Earnings before interest and taxes, and earnings before interest, taxes, depreciation, and amortization
  • FCF—Free cash flow; the sum of operating cash flow, financing cash flow, and investment cash flow
  • EPS—Earning per share; net earnings or profit divided by the total number of shares issued
  • P/E Ratio—Price to earnings ratio; the price of one share of a company divided by its earnings per share
  • Net Working Capital—Current assets minus current liabilities
  • Debt Ratio—Total debt divided by total assets
  • Debt/Equity Ratio—Total debt divided by shareholder equity
  • Return on Assets (ROA)—Net earnings divided by total assets
  • Return on Equity (ROE)—Net earnings divided by shareholders' equity
  • Operating Margin—Operating earnings divided by total revenue
  • EV/EBITDA—Enterprise value (price of the share times total shares issued) divided by EBITDA

A number of these are related; that is, Debt Ratio (Total debt divided by total assets) and Return on Assets (Net earnings divided by total assets). Key decision criteria and metrics should be limited to the critical metrics so that they are manageable and definitive goals that specific problem solving and improvement activities can be measured against. A resulting subset of metrics that may be used to measure the improvement of a company's financial position could be EBIT/EBITDA, FCF, EPS, or Debt Ratio.

A company may choose any number of decision criteria and metrics to measure project success and evaluate the achievement of its goals. It is better, however, to measure against a few critical criteria rather than try to measure against interrelated criteria or less critical measures.

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