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 your SLP 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 proportion of fixed costs to total costs. Review the chart of the proportion fixed costs (attached in Excel) - 71% of the total costs for DIRECTTV. The degree of operating leverage, 4.45 also shows a high level of fixed costs (low would be closer to 1. This is important because high operating leverage magnifies the swings in profits (up or down) when sales change. A small change in sales creates a large change in profits. So, growth is magnified but so are contractions.
Return on Investment
Return on investment is the amount over the initial investment that you earned divided by the initial investment, reported at a percent. I computed this as net income (profit) over total assets (investment) (see Excel attached). 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 "investment."
Return on investment can be easily compared to other annual rates of return and so it is easy to use ...
Your tutorial is 658 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 DIRECTTV for 2011 shown for you. Four measures are suggested for DIRECTTV's balanced scorecard.