Financial Performance Evaluation

Financial Performance Evaluation Key Performance Indicators

The financial statement accounts of ports provide the data for a standardized financial evaluation. The most common financial outcomes monitored relate to the profitability prospects and growth dynamics of port companies. Widely employed financial performance indicators include revenue, profit margin, and growth ratios, including :

  • Revenue trend 
  • Revenue growth changes
  • Gross profit margin

Focusing on the operational profitability and net earnings performance of port companies includes the following critical metrics:

  • Earnings Before Interest and Taxes (EBIT):  revenue minus all operating costs, before interest paid, taxes and dividends, or, alternatively: 
  • Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): EBIT after depreciation, and amortization been deducted.

A highly variable EBIT can indicate a risky business, whereas a stable EBIT a well-managed company with predictable  operating performance. 

  • Operating profit margin (OPM):  calculated as EBIT to revenue.  OPM indicates the net operating profitability versus total revenue and indicates how successfully management has performed to generate income from the core business operations, control costs effectively, and/or increase revenues faster than operating costs. This operating profit component is to compensate subsequently for debtholder claims (interest payments), State claims (taxes), and, lastly, shareholder claims (dividends), who bear the highest risk exposure, being residual claimants.
  • Net profit:  calculated as the gross profit (revenue minus cost of goods sold) minus operating expenses, interest paid on debt, taxes, and all other expenses.
  • Based on that, the net profit margin is calculated as the ratio of net profits to revenues, 

A set of critical and widely employed diagnostics tools to evaluate managerial efficiency of port management entities (port authorities, investors, or governmental departments) include the  Return on Equity (ROE), Return of Assets (ROA), and Return on Invested Capital (ROIC) ratios. The outcome of these ratios indicates whether the financial performance of company assets, capital, and resources improves to strengthen the company’s overall financial performance and growth prospects. At the same time, it reflects managerial efficiency to utilize investments and capital resources and to create value for the company’s shareholders (owners). Furthermore, these financial metrics also permit comparative performance evaluation over time for the port entity itself as well as against its competitors.  The ROE, ROA, ROIC ratios correspond to the following evaluations:

  • Return on Equity (ROE):  defined as net earnings to equity, indicates; how effectively the company’s management is using equity (owners’ capital) and reflects the equity component required to attain a certain level of net earnings.
  • Return on Assets (ROA):  calculated as net earnings to assets, indicates how effectively the management utilizes the company’s fixed and current assets and reflects the assets required to generate a certain level of net earnings.
  • Return on Invested Capital (ROIC):  defined as EBIT (earnings before interest and tax) to total invested capital (equity plus debt), indicates how efficiently the company allocates all its capital to profitable investments, and reflects how much capital (of any source) is required to grow the business.  

Critical financial ratios commonly monitored at the firm level for short-term management include the liquidity ratio (defined as current assets over short-term liabilities) to indicate the liquidity position of the company, particularly important at recessionary economic phases and declining markets; and the capital adequacy ratio (own equity over total liabilities), to reflect the own capital robustness and adequacy of the company to meet its total liabilities.

For those ports that are listed in stock exchanges, additional stock-related indicators come into play. The most popular indicator is the Earnings Per Share ratio, calculated as net earnings after tax to the number of shares outstanding.