CHAPTER 14 Performance measurement 591Economic value added (EVA) Short-term financial performance measure of the economic value
created over a specified time period.
Emissions trading system A market in which greenhouse gas emission permits are traded.
Greenhouse gas accounting The methods to inventory and audit greenhouse gas emissions.
Integrated report A report that presents the value creation of an entity’s strategy, governance,
performance and prospects.
Investment base Value of the investment that is used in ratio analysis.
Investment centre Division of an entity that is responsible for costs, revenues and investment in
assets.
Investment turnover (asset turnover) Ratio measuring the amount of sales generated relative to the
level of investment.
Key performance indicator (KPI) Performance measure that is critical for the success of the entity.
Mission statement Short statement that sets out the overall philosophy and objectives of the entity.
Non-financial performance measures Performance measures that are not financial in nature but are
generally more operational.
Organisational structure Structure taken by an entity to help direct and control its resources for the
attainment of its mission.
Profit centre Division of an entity that is solely responsible for both cost inputs and revenue and
therefore the profit of a division.
Profit margin Profitability ratio calculated as profit divided by sales revenue.
Residual income (RI) Short-term financial performance measure of the income or profit over a
required return on the investment.
Return on investment (ROI) Performance measure calculated as profit divided by investment.
Revenue centre Division of an entity that is solely responsible for generating revenue.
APPLY YOUR KNOWLEDGE 23 marks
JB Hi-Fi Ltd’s focus is on creating shareholder value. In its 2015 preliminary final report the company
states that the cornerstone of its success is its ability to consistently offer everyday low prices through
economies of scale, high stock turnover and low cost of doing business.
Required
a. Suggest what indicators JB Hi-Fi Ltd would use to evaluate its performance. 4 marks
b. Given its concentration on delivering consistently low prices to consumers, suggest what
factors would be dominant in the company’s balanced scorecard. 4 marks
c. Compute the Du Pont ROI, residual income and economic value added for JB Hi-Fi Ltd
for 2015. Relevant data (in millions) is as follows. 10 marks
Sales
Before tax profit
After tax profit
Finance expenses
Total assets
Current liabilities
Required rate of return
WACC$ $ $ $ $ $
3 652.136
195.532
136.511
5.927
895.013
380.336
10%^1
9.8%^2(^1) Assumed for the purposes of this question.
(^2) Calculated based on 30 per cent tax rate, 7 per cent cost of debt, 10 per cent assumed
cost of equity, market capitalisation as at June 2015 and non-current borrowings.