Performance Measures

The Capstone® Performance Measures (also called Success Measures) are:

• Cumulative Profits
• Market Share
• Return On Sales (ROS)
• Asset Turnover
• Return On Assets (ROA)
• Stock Price
• Return On Equity (ROE)
• Market Capitalization
• Cumulative Profits

Generically, profits are driven by the company’s asset base and by its efficiency working those assets. Given any two companies, if we hold efficiency constant, the company with more assets produces more profit. If we hold assets constant, the company with higher efficiency is more profitable. It follows that teams that choose cumulative profits will want a larger than average asset base, and that they will work their assets as hard as possible. A new product with an efficient plant meets those criteria. An older product with high plant utilization at high automation similarly meets the criteria. Both represent sizable investments in new assets.

In the end, an emphasis on cumulative profit drives management towards a large asset base. Managers are willing to increase debt to get there, but because interest payments consume profits, they will prefer funding with equity. Their funding priorities will retain earnings (no dividends) , then issue stock, and finally issue bonds.