Key Performance Indicator

Key performance indicators are interim production and/or financial based information used to evaluate overall corporate productivity. They are used as markers against goals and therefore they are preliminary trend(s) of outcomes.

Value Investing – Key Performance Indicators (Lesson 11)

All of us use indicators everyday to help us manage our lives. These indicators assist us with making good decisions. This same concept exists with stock investments. There are several different indicators related to stock. Most of them are financial in nature and often summed up via business ratios. However, many of the top companies provide additional indicators. One of these additional groups of indicators are ‘key performance’ markers. In effect, they are production based bits of information that assist value investors in developing and validating a good buy/sell model for that particular company.

Performance indicators are different for each industry. For the value investor, understanding the respective industry along with their systems, processes and critical points are essential when evaluating the current stock price along with market reactions. It is important for the value investor to understand not only the quantitative results of performance, but the standard of performance to measure the actual outcome against. In most cases, performance indicators exist with sales, production, and marketing/advertising. The key to success is to incorporate all these different data points and create an impact factor with the company’s stock price.

The end goal of monitoring performance is to determine if the buy/sell model requires any update. It is a simple ‘Yes’ or ‘No’ decision. When creating a trend line of data, it is best to look at as much history as possible, the author suggests no less than five years; preferably the trend line should be greater than seven years. Analytical standards place more emphasis on recent outcomes in comparison against the more historical results. Value investors take a more conservative approach and use the average of the trend line to determine the ‘Yes’ or ‘No’ model update. The reasoning is simple, short-term results or near-term expectations should have little bearing on overall historical performance and the corresponding buy and sell triggers for a particular stock. Just because the recent performance is either elevated or depressed doesn’t indicate an ongoing trend. Recent performance may have been hampered or enhanced due to environmental or unusual conditions. Basing one’s decision on the most recent results is speculative and not a sound investment concept. Using the overall average is superior as it eliminates speculation.

Value Investing – Principle #3: Financial Analysis (Lesson 8)

Financial analysis is the basis to set up a predictable and reasonable market price for the respective stock. This becomes the sell price point or what is often referred to in this series of lessons as the recovery point. If all three forces (economic, industry and company level) are performing reasonably, then the stock price for the company will recover to this sell point within a short period of time. Therefore, it is important for value investors to understand the importance of having knowledge about financial analysis.

Financial analysis is an assessment of a company’s performance in the form of dollars. The goal is to establish a trend line of financial accomplishments. It is safe to assume that the historical results can predict future results with accuracy. Again, large corporations are money generating machines; it will take several adverse actions to slow down or diminish the ability to earn profits.

Financial analysis starts with gathering research data, specifically annual and the most recent quarterly financial reports. With this information, certain data is loaded into a spreadsheet so that ratios can be determined. With the spreadsheet data, trends are tracked and from there, summarized. This summary of pertinent outcomes assist the value investor with determining the most likely outcomes for the next several quarters. Take note, value investors are not as interested in extended time frames as this methodology is designed to determine an expected recovery value for the stock in the short-term. Value investors are not interested in holding to collect dividends, there are interested in the buy low, sell high tenet of business. Thus, long-term expectations are irrelevant.

Other key information is extracted from the quarterly and annual reports to confirm trends, validate business ratios and finally, determine the expected market recovery price.

Key Performance Indicators With Construction – Backlog and Pipeline of Work (Part 2 of 3)

Backlog and the associated pipeline of work is the second group of key performance indicators for a contractor. With construction, understanding the volume of existing contracts, i.e. backlog, aids the management team in setting production goals in the near term. In conjunction with pipeline information, a contractor can quickly ascertain future financial performance. In order to do this, the contractor must create a set of key performance indicators that identify existing dollar value of signed contracts not yet started along with their respective time constraints. Furthermore, the pipeline of potential work is stratified in groups and historical performance guides the management team with what to expect for future work beyond the near term.

This is the second part of a three part series explaining the various key performance indicators used by contractors. Backlog of work refers to existing signed contracts, their corresponding dollar value and timeline for completion. Whereas the pipeline KPI is broader in scope. The pipeline of work refers to funnel effect whereby the final outcome is a signed contract. At the very top of the funnel, the widest point, sits all potential contracts that are considered leads. As the report steps into the funnel, not all leads turn into requests for estimates. The goal is have estimates turn into negotiations tied to the dollar value and time frame. The final part of this pipeline is of course final negotiations related to terms and conditions within the contract; e.g. there is a letter of intention by the customer to sign a contract given some reasonable terms and conditions.

Key Performance Indicators With Construction – Production Reports (Part 1 of 3)

Key Performance Indicator

The primary key performance indicator with construction is the annual financial income statement (profit and loss statement). For most traditional contractors, the bottom line, net profit after taxes should be no less than 7% with an average of 9.4%. If the contractor desires to be in the upper 10% of the industry, net profit must be greater than 12%. For those involved in the trades, minimum net profit should be greater than 10%, with the average being 14% and the upper tenth percentile bracket having greater than 18% net profit. Again, after income taxes are paid. However, a year is a long time to wait to review performance. In the interim there are other key performance indicators to identify trends and provide feedback to the management team. They consist of three distinct groups of indicators: 1) Production Reports, 2) Backlog/Pipeline Information, and 3) Interim Financial Outcomes.