Financial performance

Financial performance is generally defined as the ability of a company to raise and allocate funds within a certain time period. This performance is determined, among other things, on the basis of key performance indicators relating to capitalisation, liquidity, solvency, efficiencies and profitability of the company. Financial performance also indicates the ability of a company to make efficient use of the resources and assets that are available to it. Cash flow information, or information from the balance sheet, income statement and statement of changes in capital, serves as the primary source for determining financial performance and, consequently, also as a foundation for the management's decision-making process. (Fatihudin 2018, S. 553)

Financial performance indicators

In the research community, financial performance is highly discussed and there is a lot of interest in this research area, as evidenced by the high number of scientific publications on the subject. This high level of research interest reveals that there is currently no universally accepted definition for measuring performance. A historical observation also shows that the discussion about the performance concept has changed over the past years. It is currently apparent that the opinion on the definition and measurement of financial performance diverges to a large extent and only occasionally agrees. Nevertheless, from a financial perspective, the research provides four different financial performance indicators that can be used to measure performance (Tudose et al. 2022, S. 121–123):

• Profit margin
• Profit growth rate
• Return on assets, return on equity or return on investment
• Economic value added or market value added

The profit margin basically looks at total sales and subtracts all costs and expenses from them, which gives you earnings after taxes. Putting this amount in percentage terms in relation to revenue or sales it results in the profit margin. The higher the profit margin, the better the performance of the company (Nariswari und Nugraha 2022, 88,89). The profit margin shows how many percent of one euro the company generates by selling one euro of goods. The formula for the profit margin can be found below. In the industry, generally a company with a profit margin of more than 20 % is considered as healthy, and if it is below 5 %, the company's performance is not good. However, these benchmarks vary depending on the business sector and the size of the company. (Okunev 2022, 60,61):