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Journal of Education for Business

ISSN: 0883-2323 (Print) 1940-3356 (Online) Journal homepage: http://www.tandfonline.com/loi/vjeb20

Benchmarking Financial Assessment in the
Strategy Course: A Qualitative and Quantitative
Template
Kenneth E. Aupperle & Steve Dunphy
To cite this article: Kenneth E. Aupperle & Steve Dunphy (2003) Benchmarking Financial
Assessment in the Strategy Course: A Qualitative and Quantitative Template, Journal of
Education for Business, 78:4, 205-212, DOI: 10.1080/08832320309598602
To link to this article: http://dx.doi.org/10.1080/08832320309598602

Published online: 31 Mar 2010.

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Benchmarking Financial
Assessment in the Strateav Course:
A Qualitative and Quantitative
Template
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KENNETH E. AUPPERLE
The University of Akron
Akron, Ohio

E

valuating performance, whether of
publicly traded firms or the
employees working in them, is never
easy. Even evaluation of the performance of various products as pervasive
as PCs, sports cars, cell phones, and
low-tech washing machines entails
many variables that must be factored in
and controlled. Assessing a given individual’s performance is even more complicated, given all the human qualities
of both the assessor and assessee. It is
an annual rite of nonunion employees
and professionals to complain about
their performance evaluations and the
associated merit raises. Yet the motivation theory that addresses the issue of
equity is alive and well despite managerial implementation hurdles.
At the level of the firm, assessing corporate performance is even more problematic. Though business schools typically portray corporate financial
assessment as a straightforward matter,
the reality hardly could be more different. Attempting to assess firm performance through a maze of quantitative
statistics is likely to leave the evaluator
far short of the basic objective that Ezra
Solomon laid down in 1963.

In his seminal 1963 text, Solomon
argued that the financial analyst’s task is
to evaluate the change in a firm’s health
and wealth from one year to the next.
He emphasized that reliance on quanti-

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STEVEDUNPHY
Shippensburg University of Pennsylvania
Shippensburg, Pennsylvania

ABSTRACT. In this article, the
authors present a financial assessment
template for Strategic Management and

Finance courses. The template is particularly useful in capstone Strategic
Management courses that rely on financial analysis for strategic analysis,
strategy evaluation, discussion, and
debate. The template facilitates a qualitative and quantitative assessment of
multiple performance criteria through a
multistage benchmarking process and
significantly extends the framework of
an earlier benchmarking template published in the Journal of Education for
Business a few years ago.

analyses in their comprehensive case
studies. Consequently, we sought to
describe a practical tool, a financial
template, that would help faculty members upgrade their students’ financial
acumen in conjunction with their casework. The article updates an earlier
study, “Assessing Financial Performance in the Capstone, Strategic Management Course: A Proposed Template”
(Aupperle & Sarhan, 1995), published
in the Journal of Education for Business. We present a financial benchmarking template designed to be comprehensive and holistic: It is comprehensive in
that it combines quantitative and qualitative measures of financial performance, and it is holistic because it takes
into account multiple criteria within the

context of several stages of benchmarking. In this article, we significantly
extend the logic and usefulness of the
earlier template.
Financial analysis is not the straightforward process that it is often assumed
to be; in fact, it can be very complicated
and perplexing. Sometimes the financial
analyst can feel that he or she has
entered a world reminiscent of Alice in
Wonderland or a Franz Kafka novel. In
addition to accounting for the typical
problem of performance “lag effects,”
he or she must be able to recognize
many accounting oddities intuitively.
For instance, different accounting

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tative indices alone cannot produce a

reasonably sound and thorough portrait
of organizational health and performance. Hard numbers may suggest one
thing, but the more important intangibles can reveal something very different. Certainly, the recent Enron case
highlighted the need for analysts to look
more closely at the intangibles. If financial analysts had spent more time dealing with qualitative issues at Enron,
Wall Street might have better managed
the fallout and disruptions caused by
Enron’s demise.
Despite those observations, our focus
in this study was both academic and
pragmatic. Our particular concern was
the frequent frustration that Strategic
Management and Business Policy faculty members have in teaching business
students to provide good financial

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procedures can apply in a comparison of
two firms in the same industry. One firm
may be using “last in first out” (LIFO)
accounting, whereas the other may be
using “first in first out” (FIFO).One firm
might choose to use accelerated depreciation, whereas the other might not; and
one firm might close its books at year’s
end, whereas the other may close at
midyear. The balance sheets can also
pose difficulties because human
resources typically are not reported as
accounting assets. Income statements
can be misleading because management
is allowed considerable flexibility for
recording when revenue is generated.
This flexibility can result in revenue
being reported later (a quarter later) or

sooner (a quarter sooner), depending on
the organization’s need to smooth out its
performance for investors on Wall Street.
Furthermore, the comparative process
can be complicated by the diversification of competing firms. For example,
Coke and Pepsi compete with each
other, but the former is tightly focused
on beverages and the latter embraces
snack foods. It is difficult to find two
f m s that can be compared in an “appleto-apple’’ manner; rather, such comparisons are usually “apple-to-orange’’ or
even “grape-to-grapefruit.” In other
words, the analytical process is fraught
with many demons that can produce a
phantasmagoric experience.

resources and thus leads to a maximization of society’s economic wealth” (p.
24). He stated that the essential question
for the analyst assessing corporate
financial performance is whether the
firm is historically and qualitatively

“wealthier” and more valuable currently
than previously. The wealthier firm conceivably can generate relatively low
profitability ratios and still be well positioned for the future. He intuitively
acknowledged the existence of performance “lag effects” and their ability to
mask the reality of current performance.
In Table 1, we present a benchmarking template using Nike as the example
base firm. The template addresses
Solomon’s concern regarding the status
of “today versus yesterday” by comparing a company’s 5-year average with its
most recent 1-year average. In other
words, the column labeled “Nike 5 yr.”
in Table 1 is to be compared with all
other columns. The column labeled
“Nike 1 yr.” and the columns representing 5-year averages of other groups
besides Nike are the benchmarks for the
column labeled “Nike 5 yr.” It should be
observed that all of the columns displayed in the template represent 5-year
averages except for the “Nike 1 yr.” column. In addition, the “Nike 1 yr.”column
numbers should show an improvement
over the “Nike 5 yr.” column numbers

because the former represents recent
(12-month) performance. The template
design takes into account the emphasis
that stockholders, investors, and other
financial stakeholders place on recent
improvements in performance, not
merely on a long-term upward trend.
The next analytical step is to compare
the “Nike 5 yr.” column (the base column) with the “Reebock 5 yr.” column,
which represents the performance of the
firm’s most significant and typically
most important competitor (or competitors) over a 5-year period. Next, the
base column is compared with the “Ind.
5 yr.” column, which represents the performance of the firm’s industry (in
Nike’s case, the footwear industry) over
the 5-year period. The next column represents the 5-year average of the firm’s
sector (in Nike’s case, the footwear and
apparel sector), and the next represents
the 500 firms from which the Standard
& Poor’s 5-year average is derived.

The purpose of the template is to help
the analyst produce a bottom line rating
for a given firm’s overall attractiveness.
The 10-point performance rating scale
ranges from 1-2 (very poor), 3-4
(poor),5-6 (fair),7-8 (good), and 9-10
(superior). Students and analysts are
cautioned to refrain from awarding too
many 0s or 10s because these points
represent absolutes on the scale.
The reduction of a firm’s overall performance to a single score or number
requires a consideration of multiple performance criteria, both quantitative and
qualitative. The bottom line score
reflects a complex assessment process
combining profit, sales growth, and risk
analysis and in which each performance
variable is taken through various stages
of benchmarking.
We recognize that many factors contribute to making financial assessment
amazingly complicated and, at times, an
impenetrable quagmire. However, our
concern is to move as quickly as possible to the template itself.

Financial Performance Criteria

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A Template for Assessing Total
Corporate Financial Performance

In this article, we sought to offer a
pragmatic and reasonably comprehensive approach for the strategic management student attempting to assess corporate financial performance while
taking advantage of the explosion of
free, financial information now available over the Internet. In addition, we
made an effort to link the philosophical
arguments of Solomon to the comprehensive and holistic perspective represented by our benchmarking template.
Solomon (1963) suggested that profit
maximization is, by itself, a limited
means for assessing performance. As an
alternative, he proposed assessment of
the process of wealth maximizationan approach that “reflects the most efficient use of society’s economic
206

To select the performance criteria for
the framework depicted in Table 1, we
relied in part on the classic texts of
Solomon (1963) and Weston and
Brigham (1975) and recent material on
general financial analysis from ValueLine (2003), Forbes, Standard & Poor’s
(S&P), and the Internet. The framework
is based, in particular, on Multex
Investor’s (multexinvestor.com, formerly known as marketguide.com) ratio
analysis reports. That Web site presents
a group of easy-to-read tables indicating how a selected company measures
up against itself as well as its industry,
the sector, and the S&P 500. In this
manner, it simplifies the process of
determining whether the firm being
analyzed is a leader or a laggard. To
make this determination through the
enclosed template, one considers three
broad types of performance criteria: (a)
profitability ratios, (b) sales growth
rates in terms of percentages, and (c)
total risk orientation. Before explaining
these broad types of criteria, the Web
site provides directions for accessing
the Multex Investor comparison reports
on the Internet.

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TABLE 1. A Financial Benchmarking Example (1997-2001): Nike Versus Reebok, 2002

Nike 1 yr.
Profit
NPM
ROA
ROE

Nike 5
Y'.

5.96
9.35
16.81

Reebok 5 yr.

2.57
5.09
14.63

6.60
11.81
19.54

Ind. 5
Yr.

5.80
11.01
20.67

Sec. 5

Rating

S&P 5 yr.

YC.

5.49
6.60
20.96

1 1.47
8.52
22.24

7.0
7.0
4.0
6.0

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NPM= 3 wins, 2 losses [l close] (7.0); ROA = 4 wins [lclose], 1 loss (7.0); ROE =1 win, 2 losses, 2 ties (4.0);
average profitability rating = (7.0+7.0+4.0)/3 = 17.0/3 = 6.00; P = 6.0.
Note. The benchmarking is on a 10-point scale ranging from 1 (low) to 10 (high);also note that a 0 or a 10 will be
very rare.
Special note. Close [win or lose] in this template means being within 10% of the other benchmarks.
Sales Gr.

4.20

13.57

I

-3.82

13.95

Sales Growth = 2 wins, 3 losses [ 1 close]
T-Risk
Econ. *
Bus. **
Fin. ***
(a) Lt.D/eq.

Nike
Low/Mod Low
Very Low

Reebok
Low/Mod Low
Low

Industr.
Mod. Low
Mod.Low

12.15

17.00

I

5.0

= 5.0

Sector
Mod
Mod

S & P 500
Mod
Mod

Rating
8.75
9.00
8.125

.13
(4 wins)

.55

.17

2.47

.66

10.00

(b)
Tot.D/eq.

.39
(3 wins & 1 close)

.59

.37

2.71

.94

8.75

(4
Curr. R

1.88
(2 wins & 1 close)

1.44

2.46

1.94

1.70

6.25

(4
PEG Ratio

1.51
(2 wins & 2 close)

No growth

1.51

2.86

1.42

7.50

TRR
Adjusting TRR for: cash flow (+)
betdsafety (+)
(8.625 x 1.05)
polithntl risk (-)

8.625

I-

=

+ 5%

* Econ. R = 4 wins [l close] = 8.75.

** Bus. R = 4 wins I1 close1 = 9.0.
*** Fin. R = (10.00; 8.75 6.25 + 7.5)/4 = 32.5/4 = 8.125.
Total risk rating = (8.75 + 9.0 +8.125)/3 = 25.875/3 =8.625; TRR Adjusted = 9.06.
TPR (total performance rating) = (Profit + Sales Gr. + Tot. Risk) = (6.0 +5.0 + 9.06)/3 = 20.06/3= 6.69.
Final adjusted TPR = 6.69: In which 6.69 is left as is for its mixed stock price trend.

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1-year TPR trend projection (up. down, flat): flat. 5-year TPR projection: up, rising to 7.5 adjusted.

Notes. Column headings in table refer to averages for Nike, Reebok, the footwear industry (Ind.), the
apparel sector (Sec.), and Standard and Poor's (S&P). NPM stands for net profit margin, ROA for return
on assets, and ROE for return on equity. Avg. PR. is average profitability rating. T-risk is total risk, comprising economic, business, and financial (econ., bus., and fin.) risks. Lt.D/eq. is long-term debt to total
equity, tot.D/eq. is total debt to equity, Curr.R is current ratio (current assets/current liabilities), and
PEG Ratio is price/eamings ratiohales growth. TRR is total risk rating, and TPR is total performance
rating.

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Directions for Accessing the
Comparison Reports

Multex Investor provides a number of
useful and timely investment reports on
various securities. Most important, the
reports are free, and it is not necessary
to register with Multex Investor to
access many of them.
On the Internet, Multex Investor can
be accessed through either of the following two URL‘s: or .
Upon reaching the opening Multex
Investor page, students merely need to
enter either the stock symbol or the
name of the company that they are
studying and then click on “go” or press
“enter.” The next screen offers a list of
options in the far left column. The
choice that students need to access is
“ratio comparison,” which is located
under “company information.” These
ratio comparison reports generate a significant amount of financial information
and include comparisons with the industry, the sector, and the S&P 500. At the
end of the report, a list of competitors is
provided in order of descending market
capitalization. The analyst selecting a
competitor for benchmarking purposes
is generally advised to choose the 1st or
2nd company on the list. However, he or
she will need to exercise some qualitative judgment at this point. In addition,
the analyst may be facing a situation in
which a given firm is so highly diversified that there is no appropriate competitor with which to benchmark it. In such
a case, the benchmarking process can be
simplified through reliance on only four
benchmark tests in the profitability and
sales growth areas and only three benchmarks in the risk area.

Using the Comparison Reports
The Multex Investor report provides a
wealth of information for analysis, comparison, and assessment. We rely on
three broad types of criteria for analysis
and comparison: (a) profitability benchmarks, (b) sales growth benchmarks, and
(c) comprehensive risk benchmarks.
Profitability and sales growth benchmarks are self-explanatory. Risk benchmarks can be more difficult to construct
and comprehend.

208

Risk Analysis

The final dimension considered in
Table 1 addresses the issue of risk. One
type of approach is to consider risk from
three perspectives: economic (perhaps
most critical to fm success), business,
and financial.

Economic risk. To assess economic risk,
the analyst identifies a given firm’s
products and services in terms of
demand characteristics and elasticity of
demand (consistency in demand) associated with a firm’s product. Of course,
highly diversified firms such as General
Electric are likely to find that demand
elasticities may differ sharply from one
product group or SBU to another. The
analyst should consider the following
relevant factors:

1. Whether the products/services are
necessities or durables and how expensive they might be for consumers and
buyers; this is generally the most critical
factor
2. The rate of technological change in
products/servicesor production processes
3. The industry’s profile, which
includes its maturity and structure as
well as its overall attractiveness
4. Major competitors’ capabilities,
including size, market share, profits,
image, and resources (financial, production, distribution, and human resources)
5. The firm’s own capabilities
6 . Qualitative aspects of economic
risk such as the customer loyalty factor
associated with a given firm’s products
and services as well as their perceived
value relative to price

particular, nonfincancial assets such as
plant and equipment cannot be disposed
of quickly and, in the short term, typically represent a significant cost from
which there is little escape.
For example, a steel producer faces a
higher business risk than most other
manufacturers because the foundry uses
a continuous production process, which
results in fixed operating expenses
incurred 24 hours a day. In contrast,
marketing-oriented firms typically have
lower levels of business risk than do
manufacturing-type firms because both
people (employees) and inventory can
be reduced in the short term.
High-tech manufacturing at Intel
results in very high business risk
because factories cannot be closed
down effectively on a temporary basis; a
minimal crew is already a reality and
cannot be reduced much, if at all; and
the facilities and technologies involved
are relatively permanent, high-tech
expenses.
Our concern is the assessment of the
resource structure of the firm and of the
relationship of fixed costs to variable
costs. Variable costs generally vary
directly with the f m ’ s production and
sales operations. Common variable
costs include costs of production such
as labor, material, and supplies as well
as sales commissions and product delivery expenses and warehousing. The primary focus of business risk is generally
associated with the concept known as
the degree ofoperating leverage (DOL).
When assessing business risk, the
analyst also may wish to look at the
ratio produced by dividing sales by
assets (sales + assets). This ratio would
be low for a steel mill with a large asset
base in terms of plant, equipment, and
inventory (higher ratios would generally
indicate lower levels of business risk).
An athletic shoe manufacturer that contracts out nearly all of its production
line (e.g., Nike) has a significantly
lower asset base and, compared with a
steel mill, will have a very high ratio
(very low business risk). In a sales
downturn, the steel mill may be especially vulnerable to business risk, but an
athletic shoe firm such as Nike may
have a comparatively greater ability to
survive a downturn. The DOL and business risk factor also help to explain why

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The first of these factors is by far the
most significant.

Business risk. To assess this factor, the
analyst assesses the firm’s ability to
cover fixed operating expenses. Fixed
costs are contractual costs that must be
paid out regardless of varying levels of
output or sales. Fixed costs typically
include items such as debt financing;
physical plant realities regarding maintenance, rendleasing, utilities, insurance
premiums, and managerial and professional staff salaries (where the firm
must operate with at least a skeleton
crew); property taxes; and licenses. In

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stock values for domestic automobile
firms tend to rise significantly in an economic expansion and to drop sharply in
an economic recession (contraction).
Such business risks often are masked
by a purely quantitative analysis. For
example, at Enron, an excessively risktolerant and inept management was able
to hide much of the firm’s risk.
Although some of the financial measures hinted at the existence of significant risk, top management’s ability and
desire to mask this risk apparently
played a part in the firm’s eventual
bankruptcy. A qualitative assessment of
management’s willingness to speculate
in futures markets and its willingness to
engage in “off the books” deal-making
might have revealed this heightened risk
(Nussbaum, 2002) to interested and vulnerable stakeholders.
It is important to note that, to a large
degree, the template described in this
article assesses business risk on a relative
basis (relative to major competitors,
industry, sector, and S&P 500). Some
industries and business sectors are
inclined to have higher levels of business
risk (such as airlines, which have fixed
costs associated with the ownership of a
fleet of planes) than industries such as
apparel firms that outsource production.

4. PEG ratio = price/eamings ratio +
sales growth. The pricelearnings (PE)
ratio is the stock price divided by the
“primary” earnings per share (excluding
extraordinary items paid to common
stockholders in the form of cash dividends during the trailing 12 months);
this ratio comprises the numerator. Sales
growth comprises the denominator (typically sales growth, occasionally earningshhare growth). The analyst determines the overall PEG ratio by dividing
the current PE ratio by the firm’s 1-year
sales growth percentage. The ratio
should yield a small number; the smaller the number, the better. A given firm’s
PEG ratio should be compared with
those of competitors, industry averages,
the sector, and the S&P 500.

Beta is a measure of a company’s
common stock price volatility relative to
the market. Beta values equal to 1
mimic the price volatility of the market.
Values less than 1 are less volatile than
the overall market. Values greater than 1
indicate higher volatility than that of the
overall market. High volatility is generally less desirable.
The safety index is used as an additional overall measure of a given firm’s
total risk exposure. This index is considered by ValueLine to be a total corporate risk instrument and broadly
incorporates economic, business, and
financial risk as well as risk represented
by a firm’s beta. ValueLine (2003)
points out that the safety index is

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It is important to note that the first
two aspects of risk-economic and
business-pose problems for the external analyst, who generally does not
have explicit internal and quantitative
data with which to work. As a result,
this part of the assessment becomes
fairly qualitative compared with the
kind of assessment possible in the area
of financial risk. Financial risk assessment is typically more straightforward
because of the significant amount of
quantitative data available to external
analysts. We recommend using the
PEG ratio because of its ability to shed
light on a firm’s overall financial risk.
Still, for the purposes of the template
depicted in this article, this measure is
optional.

a measurement of potential risk with

individual common stocks. The Safety
Rank is computed by averaging two
other Value Line indexes-the Price Stability Index and the Financial Strength
Rating. Safety Ranks range from 1
(Highest) to 5 (Lowest). Conservative
investors should try to limit their purchases to equities ranked l (Highest) and
2 (Above Average).

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Financial risk. To assess financial risk,
the analyst examines the firm’s ability
to cover fixed financial expenses.
Although balance sheet strength and
cash flow are important, the major concern is the firm’s degree of financial
leverage (DFL). The analyst focuses on
the relationship of debt to equity and, to
a lesser extent, the current ratio and
quick ratio. The key measures are
defined as follows:

Adjusting the total risk rating. As a
complement or a crosscheck for the
three aspects of risk discussed above,
adjustments in the total risk rating
(TRR) are made for cash flow and
betdsafety as well as political and international risk.

ValueLine uses a proprietary formula
that might need to be viewed with some
caution. Though the safety index is useful for obtaining a broad perspective
regarding a given firm’s overall risk
orientation, ValueLine does seem to be
a bit biased in its safety index. For
instance, traditional companies that
possess a significant asset base often
appear to be rated a bit more favorably
than one might expect. Such a bias in
recent years could conceivably be a
problem as large asset-based organizations struggle to downsize and shed
material assets that are declining significantly in value.
PoliticaWinternational risk. An
assessment should be made of this risk.
Getty Oil, for example, faced considerable threats of expropriation of its major
land holdings in Libya in the 1950s and
1960s. Eventually, Getty Oil’s Libyan oil
fields were expropriated. A downward
adjustment may need to be made for (a)
companies facing considerable international risk from expropriation or excessive exposure to unfavorable currency
fluctuations and (b) companies facing
greater political or legal risks; for example, those in the tabacco industry.

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1. Long-term debt to total equity
(most recent quarter) = long term debt +
total stockholders’ equity.
2. Total debt to equity (most recent
quarter) = total debt i total stockholders ’
equity. This ratio is total debt for the
most recent fiscal quarter divided by total
shareholder equity for the same period.
3. Current ratio = current assets i
current liabilities. This is the ratio of
total current assets for the most recent
quarter divided by total current liabilities for the same period.

Price to free cash flow per share is
calculated by taking the current price of
the stock and dividing it by the trailing
12-month free cash flow per share. Free
cash flow is calculated from the statement of cashflows as cash from operations minus capital expenditures and
dividends paid. Cash flow is then a measure of the available funds over and
above expenses that are available for
discretionary use by the firm.

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Five Stages of Benchmarking

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The framework depicted in Table 1
uses 5 stages of benchmarking for both
profitability and sales growth assessment. No single stage is capable of providing enough information to enable an
analyst to make an informed judgment
as to how well a given firm is performing overall. As a result, the template
facilitates a holistic assessment by
requiring the analyst to proceed through
five stages or steps by first comparing
the base firm’s 5-year performance
(“Nike 5 yr.”) with its 1-year numbers
on the left (“Nike 1 yr.”) and then moving to the ever-widening 5-year benchmark perspectives to the right. Such a
systematic process recognizes the
unique validating portrait of each individual stage. Collectively, these stages
can provide a comprehensive, overall
view of a given firm’s financial health.
Perhaps the most important benchmark
test is the first, in which a given firm is
assessed on whether its most recent
yearly performance shows improvement
over that of the 5-year period.
An emphasis on excellence, quality,
and continual improvement requires
that multiple comparisons be made. We
can compare this process with the way a
competitive runner might assess his or
her performance. The runner must
benchmark his or her current yearly performance against (a) his or her performance over time, (b) the performance of
a major competitor or competitors, (c)
that of other runners in his or her own
age group (an industry-like comparison), (d) all runners in his or her gender
(a sector-like comparison), and (e) all
runners in general (the S&P 500).
To fail to make such comparisons
could create a false illusion that a firm
is becoming stronger financially.
Although its performance over time
may have risen, the firm’s rivals and the
respective industry may conceivably be
showing even better results and more
improvements. In the long run, this situation is likely to produce a major competitive disadvantage. Though it is not
always easy to identify the “right” specific competitor, it is useful to note that
a given firm also competes with itself
over time, as well as with its industry,
its sector, and the S&P 500.

Once the analyst possesses the relevant and generally quantitative information for each benchmarking stage, he or
she must assess each test of performance qualitatively. Is the base firm in
question performing better over the last
year (in comparison with its 5-year
average) and better relative to its major
direct competitor, the industry, the sector, and the S&P 500? Each of the performance criteria that are posed vertically in the template is individually
assessed horizontally through the various benchmark stages.
The analyst tracks both the number of
victories or the success rate of each criterion and the margin of victory or
defeat for a given firm when he or she
goes down the row of benchmarks.
Benchmarking is done on a scale ranging from 0 to 10. Taking the number 10
and dividing it by the number of benchmarks determines point totals that are
available per benchmark test. For the
profitability and sales growth sections
of the template, five benchmarks tests
are performed, and as a result each test
is worth as much as two points (10
divided by 5).
For the comprehensive risk portion of
the template, the analyst uses only four
benchmarks, which results in each
benchmark test being worth as much as
2.5 points. Ties are defined as being
within 10% to 15% of a comparison
benchmark (+ or -) and are typically
awarded half of the benchmark points
for that particular test. In the case in
which 5 benchmarks are used, a close
call for a given benchmark test equals 1
point. In the case of four benchmarks,
this equals 1.25 points or half of 2.5.
For example, benchmarking through
four stages could reveal that a fm is
winning two small battles and losing
two small battles. In such a scenario, the
firm could be performing slightly above
competitor and industry averages while
performing slightly below the sector
and S&P 500 averages. As a result, if
the four benchmarks were all within
10% of the base performance, the analyst would award 4 ties and score the
firm a 5 (4x 1.25 = 5). A performance
rating of 5, which depicts a fair performance, would be registered in the
appropriate space in the far right-hand
column titled “Rating.” However, if the

two victories were substantial and the
two defeats minimal, a performance rating of 7.5 would be warranted.
After each component (i.e., net profit
margin [NPM]; return on assets [ROA],
return on equity [ROE]) is taken
through this benchmarking process, the
analysis generates an average score to
produce a final performance rating for
that criterion (i.e., profitability). It
should be noted that each of the profitability ratios is weighted equally here.
However, an analyst may wish to use an
unbalanced weighting. For instance,
because the ROA is less vulnerable to
management’s manipulation, it could be
accorded a much higher weighting
(50% instead of 33.3%).
The analysis of sales growth is a
straightforward, horizontal comparison.
However, total risk, like profitability, is
made up of multiple criteria that include
the following components: economic,
business, and financial. It is important
to note that the total risk rating (TRR) is
adjusted up or down depending on a
number of additional factors such as
cash flow, beta, safety, and political and
international risk.
The next step is to compute an overall average or total peg5ormance rating
(TPR), derived from the three broad criteria assessed through the benchmarking process. Again it is useful for the
analyst to observe that the three components (profitability, sales growth, and
total risk) are equally weighted. However, he or she may prefer to use an unbalanced weighting that gives profitability
more emphasis and, in return, reduce
the emphasis on risk and sales growth.
The template also provides for a realworld adjustment of the bottom-line
score. For instance, an adjustment of up
to 10% to 15% can be made on the TPR
for its stock price trend over the past 12month period (relative to the overall
market trend). If, however, the 5-year
outlook for the firm looks promising (or
bleak), additional adjustments up (or
down) can be made. The point is that the
process of benchmarking is an art, not
an exact science, and it is based on
quantitative and qualitative factors. A
certain amount of room for judgment is
reserved for the analyst to make adjustments in the total performance rating
depending on relative and absolute

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stock price trends over the past year
and, to a lesser extent, long-term (5year) trends in the industry.

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The Financial Assessment of
Nike: An Applied Example

The assessment process displayed in
Table 1 shows the most currently available financial data representing the
benchmark figures for Nike, Inc. in comparison with its major domestic competitor, Reebok. Nike designs and develops a variety of footwear, apparel, and
accessory products targeted toward the
athletic and leisure market. The company sells to approximately 19,000 retail
accounts in the United States and
approximately 140 other countries (ValueLine, 2003). ValueLine analysts
believe that the company has taken
advantage of the growing trend in fashionable athletic footwear for young
women. Continued support exists for the
company’s performance running shoes,
men’s basketball shoes, crosstraining
footwear, and children’s shoes.
The first benchmark, “Profit,” is
made up of three components: net profit margin, return on assets, and return on
equity. Nike’s most recent 1-year NPM
was less than its 5-year average but
close enough to be within a 10% to 15%
range (a close lose). The 5-year average
beat Reebok’s 5-year average as well as
those of the industry and sector. However, Nike’s NPM was not as strong as the
S&P 500’s 5-year average. This means
that on the row “NPM” Nike scores 3
wins and 1 tie (a close call) and earns 7
points ([3 x 21 + [ l x I] = 7).
The row “ROA” shows the same trend,
but here the tie is with the industry
benchmark. Again, 7 points are awarded.
Finally, the ROE row shows only 1
win over Reebok. Still, ROE figures
came within 10%to 15% of the industry
5-year average and the sector 5-year
average. But they lost to the S&P 5-year
average, and the 1-year performance is
below the 5-year. This means that 1 win
and 2 ties are noted, and 4 points are
added to Nike’s total in this category
([l x 21 + [2 x 11 = 4).
Overall, the average profit rating
came to 6 {(7+ 7 + 4) + 3)}.
The second major benchmark is sales
growth. Although Nike’s recent 1-year

sales growth has not been as strong as its
5-year number (a loss), the 5-year average sales growth exceeds Reebok’s 5year growth and the sector’s 5-year
growth. Two wins and 1 tie with the
industry are noted. Sales growth points
came to 5 ([2 x 21 + [ l x 11) = 5.
The third benchmark, total risk, has
three equally weighted components:
economic risk, business risk, and financial risk. Financial risk has four subcomponents: (a) long-term debt t equity
(Lt.D/eq.), (b) total debt + equity
(Tot.D/eq.), (c) current assets + current
liabilities, or current ratio (Curr.R), and
(d) price/earnings ratio t sales growth
(PEG ratio). Though we intuitively suspect that the economic risk factor is the
most important, we decided to leave all
four equally balanced in order to keep
the analytical process presented in this
article less cluttered.
Looking at the first component of
total risk-that is, economic risk-we
found that Nike faces low economic
risk. A case can readily be made that
footwear, even athletic footwear, is a
necessity for most consumers. Nike has
positioned its products in such a manner
as to be the shoe of choice for a majority of consumers, particularly among
fashion-conscious teenagers, fitnessoriented adults, and mall-walking senior
citizens. As a result, demand is not likely to drop much during an economic
recession. High-end shoes may temporarily decline in demand, but Nike
has a significant array of moderately
priced shoes for its various market segments and thus ensures that demand will
be relatively inelastic. In addition, Nike
appears to have lowered its economic
risk by employing improved technologies in its production and marketing
processes. Furthermore, the company
has an automatic replenishment program in place with its retail accounts
(ValueLine, 2003).
We also believe that Nike has exceptionally low business risk, the second
component of total risk. The company’s
products sell at prices that provide a significant cushion for covering fixed
costs. Furthermore, the degree of operating leverage has been historically low
because the company outsources nearly
all (98%) of its production.
Because economic and business risk

are highly qualitative, it is perfectly
acceptable to assess risk unilaterally. In
other words, we assessed economic and
business risks primarily from Nike’s
vantage point, employing little or no
benchmarking.
We then looked at the third component of total risk, financial risk, and
found that Nike’s financial risk ratios
show a relatively secure position. It has
drastically reduced its long-term debt.

Long-term debt + equity ratio gives
Nike four wins across the board (4x 2.5),
producing 10.0 benchmarking points.
Total debt + equity ratio yields 3
wins and 1 close loss for a total of 8.75
benchmarking points { (3 x 2.5) + 1.25 =
8.75)}.
The current ratio yields 2 wins and
1 close score {(2 x 2.5) + 1.25) for a
score of 6.25.
The PEG ratio (in which lower
numbers are more attractive) shows 2
wins and 2 close losses { (2 x 2.5) + (2 x
1.25)) for a score of 7.5.
The financial risk composite score
is calculated by averaging Lt.D/eq. +
Tot.D/eq. + Curr.R + PEG Ratio. This
yields a financial risk rating of 8.125,
which is a composite of { (10.00 + 8.75
+6.25 +7.5) + 4 ) .
The total risk rating of 8.625 is a
composite of economic, business, and
financial risk of I(8.75 + 9.0 + 8.125) +
31.

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An overall 5% upward adjustment is
made for the total risk rating, which is
on the conservative side. Nike is adjusted positively for its strong cash flow
(+), reasonable beta value (0), and a
very reasonable safety rating indexed by
ValueLine at a positive 2 (+) (on a scale
of 1 to 5 in which 1 = very attractive).
Politicalhnternational risks remain negative (-) with Nike’s overseas manufacturing facilities, but these risks seem to
have lessened as Nike responded to the
charge that some of its offshore subcontractors engaged in unethical and illegal
labor practices and facilitated the existence of predatory sweatshops. Still, we
see too many negatives to discount risk
totally as a relevant factor in the international arena.
Multiplying the total risk rating of
8.625 x 1.05 yields an adjusted total risk
rating of 9.06. Adding this, the third
MarcWApril2003

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benchmark, to the other profit rating
benchmark of 6.0 and sales growth rating of 5.0 yields a total performance rating of 6.69 I(6.0 + 5.0 + 9.06) f 3).
The analyst must not stop here, however. Questions remain. What is the stock
price trend over the past 6 to 12 months?
What are the growth prospects for the
company? How will things look 5 years
from now? Can growth be sustained?
Nike’s stock price has been trending
downward over the past year, but so has
the market in general. We conceivably
could take a conservative approach and
adjust Nike downward bylO%, given its
yearlong trend. However, it would probably be wiser to leave Nike’s final performance rating alone because its stock
price decline corresponds very closely
to stock price trends in both its industry
and Wall Street in general. By using a
10% deduction, one would arrive at a
final adjusted total performance rating
of 6.0. Subsequently, we chose to make
no adjustment up or down given Nike’s
relative stock market performance.
It is also useful to note that Nike has
shown improvement since September 11,
2001 and continued to show further
improvement early in 2002. In light of
Nike’s long-term (5-year) prospects for

212

increased sales, improved margins and
healthy profits, we chose not to penalize
Nike and leave its total performance rating at 6.69. A more liberal analysis could
even result by adjusting the TPR upward
to 7.5. However, our final adjusted rating
for Nike is 6.69 and is likely to rise in the
very near future because the firm appears
to be healthier and wealthier relative to
last year and perhaps the last several
years. Still, it is also worthy to observe
that a new powerful European competitor has reawakened: Adidas.

integrates the varied realities of profitability, sales growth, and risk orientation. It makes no effort at factoring in or
even assessing corporate social responsibility; nor does it attempt to assess various stakeholder factors or determine
whether organizational goals and performance actually match. Instead, the analysis uses a basic benchmarlung approach
to holistically determine a firm’s bottom
line relative to its various benchmarks, its
recent past, and its near-term future.
REFERENCES

Conclusion

The benchmarking process described
in this article offers a comprehensive
approach that uses multiple criteria
applied through a multistage analysis.
This approach pulls together many interconnected accounting and financial
strands to produce a rich financial tapestry. We believe that the new template represents a higher level of analysis and
leads to improved decision-making.
Unlike the broad focus of Kaplan and
Norton’s “balanced scorecard” (1993,
1996), the template that we have
described in this article facilitates a balanced financial portrait that effectively

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