How to Measure a Firm Financial Perfomance - Essay Example

The paper "How to Measure a Firm’s Financial Performance" is an outstanding example of an essay on finance and accounting. There are a number of ways to measure a firm’s financial performance. While there are competing theories on the matter, most analysts agree that all elements must be considered in aggregation (Helft 2003). Within this context of understanding, the firm’s revenue from operations, operating income or cash flow, and net income are all important considerations (Helft 2003). There are a number of further measures that examine these figures in aggregation. One of the most prominent is referred to as return on equity (ROE). ROE measures accounting earning for a period per dollar of shareholders’ equity invested. ROE is a popular determinant as it incorporates many important aspects of the company’s balance sheet (Helft 2003). Still, ROE has been shown to have some shortcomings including the timing and risk problems that consider, respectively, the firm’s performance in relation to past quarters and potential risk investments (Helft 2003). The value problem is another challenge to ROE investment analysis (Helft 2003). Another prominent means of investigating financial performance is through profit margin. (Higgins 2000) Analysts can use profit margin to measure a firm’s supply chain management and pricing strategy. Another prominent strategy is asset turnover, as this gives insight into business practices. Financial leverage is another important measure of financial performance (Higgins 2000). Financial leverage measures a firm’s assets in relation to the shareholders’ equity. While these financial measures are all important as measures of a firm’s financial performance, it’s necessary to consider these performance measures relative to other companies in the sector and in terms of macroeconomic market fluctuations.