Performance evaluation is essential in controlling investment centers.
An investment center is a subunit of an organization that has control over revenues, costs, and certain assets. The two most widely used tools used in evaluating investment centers are: return on investment (ROI) and residual income (RI).
Aside from the ROI and RI, there are other performance measures that can be used.
Performance Evaluation Measures
1. Return on Investment (ROI) - measures the degree of profitability by dividing income over investment.
2. Residual Income (RI) - the excess of income earned over the desired income.
3. Economic Value Added (EVA) - a more precise version of residual income that considers after-tax operating income, weighted average cost of capital, and current obligations.
4. Market Value Added (MVA) - measures the difference between the market value of the firm and the book value of the invested capital.
5. Equity Spread (ES) - calculates the value creation of equity.
6. Total Shareholders' Return (TSR) - calculates the combined return from change in stock price and dividends.
7. Manufacturing Cycle Time - or throughput time, is the time required to convert materials into finished goods.
8. Manufacturing Cycle Efficiency - measures how much of manufacturing cycle time is devoted to value-adding activities.
In addition to the above measures, the company may also adopt the concepts of balanced scorecard. Balanced scorecard takes a look at four major components (known as lenses) that affect the achievement of organizational goals and implementation of strategy. These lenses are: (1) financial perspective, (2) customer perspective, (3) internal business process perspective, and (4) learning and growth perspective.