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4 options to measure value creation (Problems with traditional accounting…
4 options to measure value creation
Problems with traditional accounting methods (GAAP)
Value = future
Profits in past
Based on transactions
Dependent on method of accounting
A/c conservative bias
hard to measure intangibles
ignores cost of equity capital
ignore risk and change in risk
Short term/backards looking
One - use Market measures
Actual market indicators
Actual market returns
Realistic sense of current value
Risks
Over state value
prone to volatility
Doesn't reflect intrinsic value
Only measure certain performance
Two - improve non-GAAP measures
Other Performance measures
Free cashflow
EBITDA
Economic profit
Three - Extend measurement window
Extend accounting timeframe
Several years
Long term incentives
Combination of measures
Add range of performance measures
forward looking
longer term
Non financial
Operational KPI's
Customer Service
R & D
Employee Turn over
Bring better overall picture
Use one or many