Value Investing – Key Performance Indicators (Lesson 11)
“If it cannot be measured, it cannot be managed.” Peter Drucker
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 upon the company’s stock price.
The first section below explains how each industry is different and the thought process value investors must use to assess the respective members of that pool of investments. It is best to identify the top three key performance indicators and their respective impact on the overall financial performance of the company. Once you understand the industry’s respective critical points, value investors can then develop the standard of performance. Often the standard of performance is provided by the company in its annual report. There are other resources for each industry, one of the best resources is the Department of Commerce for U.S. based operations. With a standard to work with, quantitative results can
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