Ratios are used for many purposes, performance measurement is one such application. However, not all performance measures are expressed as a ratio. Do some research on the internet to learn about operating leverage, ROI, EVA, and pick another performance measure of your choice. You will note that there are variations in the computations of a particular measurement. Consistency in application is the key.
Use information from the latest financial statement for Walgreens company to compute the measurements you researched.
Reflect on the advantages and disadvantages of these performance measures. Choose your preferred measure and explain your rationale.
Operating leverage is a measure of the degree of fixed costs. That is, in the total expenses, what proportion are fixed versus variable. This is important because high operating leverage magnifies the swings in profits when sales change. A small change in sales creates a large change in profits. So, growth is magnified but so are contractions.
We can't really compute this for Wallgreens because they are not required to report fixed versus variable costs. They report operating versus non-operating but not variable versus fixed. If you assume that COGS is all variable and SG&A is all fixed, you can see the computation on the attached spreadsheet.
Return on Investment
Return on investment is the amount over the initial investment that you earned divided by the initial investment. This is usually reported as a percent. The return on investment for Wallgreens is on the attached spreadsheet. ROI is usually more of a measure for a new project or particular decision. For the entire firm, the ROI is usually called the Return on Assets, using total assets as the ...
Your tutorial is 697 words plus five references and suggests a new measure of performance and explains why. There is a spreadsheet attached with some assumptions and then the measures for Wallgreens for 2011 shown for you. A sample balanced scorecard is presented.