It seems one topic that often comes up at industry events that operators dance around is their key performance indicator. Everyone is interested in knowing what one key performance indicator or metric their fellow operators value the highest and why. So, we recently asked industry specialists and operators that question and received the following responses:
"There are many, however I look at the trend of earnings before interest, taxes, depreciation and amortization (EBITDA). As this grows and the balance sheet stays in check, it indicates positive operational growth and profitable trends. EBITDA provides a true indication of operations. From this you can step further as to free cash flow, once you factor in CAP EX, debt service and tax distributions.”
— Keith Severson Jr., CPA, Partner, Eide Bailly LLP, Sioux Falls, S.D.
"There are certainly a number of important candidates that can be is return on capital employed (ROCE). Ultimately, an investor/ owner wants to know how their investment is performing, and return on capital allows one to see the return being earned on invested capital whatever the combination of owner’s equity or interest-bearing debt. ROCE allows for easier performance comparisons between companies and even different time periods for the same company since, unlike return on equity, it delivers results. ROCE can be further enhanced if privately held company adjusts earnings for payments that may be going out for the benefit of ownership that don’t show up as company earnings (like perks, owner salary in excess of hired manager salary, excess or deficient lease payments for family-owned assets used by the business), and if equity is adjusted to reflect market vs. book value (for most companies this consists of marking up or down real estate held in the business to market value).”
— David M. Nelson, Ph.D., Professor Of Economics At Western Washington And President Of Frmc/Study Groups, Bellingham, Wash.
"I too would echo Keith’s comments as cash flow analysis is the rimary thing we look at.”
—Matthew J. Smith, Business Banker, Dacotah Bank, Sioux Falls, S.D.
"For me it is return on capital employed (ROCE). If calculated correctly it tells a business owner what they are truly earning on all capital they have invested in their business. When an owner examines ROCE and discovers they are consistently earning returns far less than the industry average, they must question the underlying logic of continuing versus the risk of loss of their capital. If they cannot increase their return, the question they should ask is: Are they keeping a job or running a business? Tough question, but it needs to be asked more often these days.”
—Francis O. Bologna, CPA, Managing Director, Francis, Bologna & Assoc. LLC, Gretna, La.
The additional performance metrics that follow closely in importance to the above for the travel plaza industry as reported by operators include:
- Break even cost per gallon,which reflects the number of cents an operator needs to earn on each gallon of fuel sold to break even.
- Trend analysis of pre-tax income and pre-tax income growth.
- Trend analysis of same-store sales for all categories (fuel volume, inside sales, food, facility revenue, other income).
- Labor productivity ratios are also a key metric operators utilize to monitor labor efficiencies at their stores.
Now you have some of the top key items. In the next issue, I will discuss the formulas behind the metrics and explanations for each.
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