The course consists of 5 parts framed by an introduction and a conclusion.

The introduction introduces the objectives and structure of the course.

Introductory part

This section defines performance as a comparison between the economic profitability of the firm, the profitability generated by its operating assets, and the cost of financing, which reflects the return expectations of investors, who provide capital. Then, it shows that performance is the source of value creation and presents its contribution to the financing of the company growth. The presentation of a detailed outline of the course concludes this introduction.

Part 1 – Assessing Economic Profitability

Economic profitability is not accounting profit. It focuses on the return on capital invested in the operating assets. The ROCE, economic return index, is defined as the operating income in relation to the operating investment. ROCE will be broken down into commercial profitability, on the one hand, and asset productivity, on the other. This part not only presents the mechanics of the construction of the return indicator, but also introduces the main ratios for carrying out the financial analysis.

Part 2 – Calculating the cost of capital

Shareholders and financial creditors contribute to the financing of the company and expect a return linked to their respective risk-taking. The weighted average cost of capital (WACC) calculates the profitability required by each category of investors in proportion to their contribution to the financing. This section shows how each category of investor thinks in terms of perceived risk and required return. It presents some important technical aspects to be taken into account in the calculation of the WACC and introduces the issue of the optimal balance between debt and equity in the structuring of the firm’s financing.

Part 3 – Measuring Financial Performance

The economic profit, a key indicator of financial performance, is calculated as the difference between economic return and the cost of capital. This indicator is not to be confused with the net profit, as it includes the profitability expected by shareholders, and it is very concrete for operational staff. This part formalises the relationship between performance and value creation mentioned in the introductory part and shows the contribution of growth to value. Still, however rational it may be, the economic performance indicator must be used with caution, as it can lead to a short-term decision in the allocation of resources.

Part 4 – Improving Financial Performance

Financial performance should accompany the decisions made in the operations of the company. In order to help decision-making, the performance tree provides operational decision-makers with both a useful calculation and a very concrete visualization. The use of the tool is shown in the following situations: sales growth, business divestiture, outsourcing (make-or-buy) and operating cycle management (WCR).
The conclusion reviews the main concepts and their relevant use.