Holden Case

Question 1

Holden has already selected four financial metrics to focus on. In total, how many different financial performance metrics do you think can be best embraced by her intended target audience and effectively communicated to them? Why?

Holden's target audience can embrace up-to 8 ratios at best. The reasons are as follows:

Middle managers have grown through the ranks with little or no management education.

As engineers, they are well versed with the operating parameters of the business and therefore the focuses on financial aspects of the ROE decomposition were important.

Beyond 7 ratios, the middle managers would feel pressurized towards absorbing way beyond what is needed. This is also because from an external perspective as well as an operating perspective most of the ratios use similar information to tell the same story differently.

At the same time, Holden can be focussed on achieving maximum impact by demonstrating the importance of the 7 selected ratios and how they tie into manager's performance and consequently MCDP's performance.

Question 2

Besides the four financial metrics that Holden has already selected and given the general constraint of your answer to question 1, what are the other metrics from the case Exhibit 1, if any, that you would recommend she select? Why? What trade-offs did you have to make in selecting some and not others?

The other 3 ratios besides Earnings per share , debt ratio , interest coverage ratio and return on equity ,that have been selected are :

1. Gross Profit Margin : This gives the managers an understanding of profitability of their products they sell and can identify the firms performance variation either by change in sales price or change in cost structure of the dining products they sell.

2. Cash Conversion Cycle or Net working Capital : This is a working capital measure , however besides just explaining what the working capital position of MCDP is , this can also provide an understanding of the drivers of Cash conversion cycle which are :

a. Accounts Receivable Days.

b. Inventory holding period.

c. Accounts payable days.

These drivers can then help managers dig deeper into working capital problems. Managers can then decipher and isolate issues that would not have been possible otherwise. For instance, the Cash conversion cycle may be poor either because MCDP may take too long to collect their cash or pay their suppliers too quickly.

3. Operating Income per Employee : This is a productivity as well as contribution measure. This ties every employees performance to proifitabilty and hence to ROE and thus to the share price and analyst