WACC as the touchstone performance indicator: The use of financial ratios as performance indicator – from operations to capital investments

Abstract

Purpose

The purpose of this paper is to propose a simple framework to help practitioners to analyze and evaluate their performance more accurately and easily from the perspective of value adding concept.

Design/methodology/approach

The proposed framework separates management and operations into two different functions in the flows of capital investment and return. This paper suggests the application of the concept of Du Pont ratio (disaggregation of return on asset) for operators to address their true value driver along with the use of the weighted average cost of capital (WACC) as the benchmark for performance.

Findings

The paper stretches the concept of economic value added into two different tiers of a business organization – operations and top management. This framework can be institutionalized to evaluate operations and management more effectively from two different business dimensions – ROS and asset turnover. Industry practitioners can adopt the concept and develop it further accommodating their unique business situations. Multi‐unit operators can put the performance records of individual units this way for further analysis and improvement. At the same time, the entire company's performance can be put into two different dimensions for more effective analysis – operations and top management.

Research limitations/implications

As a conceptual paper that proposes a framework, this paper does not provide empirical data analysis. However, the framework is designed using a set of simple financial ratios that are commonly used in the industry.

Practical implications

As a generic framework, all segments of the hospitality industry can adopt this approach to evaluate their performance. The range of application can cover from individual units to an entire corporation.

Originality/value

This paper suggests specific application of financial ratios to separately evaluate the performance of operations and top management by proposing the use of WACC as a benchmark.

Citation

Jung, H. (2008), "WACC as the touchstone performance indicator: The use of financial ratios as performance indicator – from operations to capital investments", International Journal of Contemporary Hospitality Management, Vol. 20 No. 6, pp. 700-710. https://doi.org/10.1108/09596110810892254