Various key metrics are computed to monitor the performance delivered by the operations of a company. These metrics are then compared against their competitors and the industry standard to draw conclusions. The top three metrics are as follows:

Operating margin
Return on capital employed (RoCE)
Return on equity (RoE)

In the upcoming video, our faculty Marie-Lys will explain the first metric, i.e., operating margin.

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As you learnt in this video, the operating margin helps in determining the operating profit per unit of sales revenue. It is calculated using the following formula:

$O p e r a t i n g m a r g i n = \frac{O p e r a t i n g i n c o m e}{S a l e s r e v e n u e}$

You also saw the operating margin of five years of five different companies from the automotive industry. This type of analysis helps in determining the performance of a company in comparison to its peers and the industry standard.

In the next segment, you will learn about the second metric, i.e., return on capital employed (RoCE).

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Transcript of the Video:

Let's formalise the key metrics that are usually computed in order to monitor the performance
delivered by the operations of a given company. We said, the first question we would like to raise would be how much profit did the operations generate out of $1 of sales.

So, let's open up an income statement and let's have a look. We need to locate the operating
income. That must be roughly in the middle of the income statement. So, there it is. And then we compute that operating income as a percentage of the sales revenue. And here, we are going to say that we have an operating income of 5% or an operating margin of 5%. Is that good? Is that bad? Well, actually, I don't know. These numbers depend very much on the industry we are in.And even within an industry, things can change very much over time and between different competitors.

I took an example in the automotive industry, for example, and I looked at the income statements
of different companies from 2015 to 2019. And see the results here on that graph. You can see a top performer in that industry that has been the case for the past five years. This is Toyota.

Strong performance, very robust performance throughout the different years. Some things stable
and operating margins stable around 8%. Then you have different types of competitors. You have, for example, Volkswagen.

They were in trouble by 2015. That was the time of the diesel gate.
Somebody not knowing the story would feel like, hey, how come they were at a loss in 2015 while
everybody else was making money? What happened to them?

So, you would have a look into the financial statements, read the notes, and you would learn about
the Diesel Gate and the problems it generated at the company. But see, they are now back on track. It took them quite some time, but after two years, they were back on track. And as of 2017, you can see their operating margin close to 6% and even slightly above 6% last year.

An other interesting company to look at would be PSA, Peugeot, Citroënin, PSA was not in a very
nice situation by 2015.And the situation was even worse in the pastures before 2015. Actually the group went very close to bankruptcy, because they took time before they truly made some strategic decisions to close
under utilised plants to renew some of the cars in their product portfolio. So, by that time, the company wasn't doing really well. Then a new CEO came on board, decided
to turn around the situation.

And really things started to change when Mr. Tavarez arrived and gradually you see the
performance of PSA increasing year on year, very steady manner.

And in 2018 -2019, they had a performance very close to the one of Volkswagen who is one of the
best performers in Europe. So, that looks as well like an outstanding performance.
And then we have two more groups. We have Ford from the US and we have Nissan from Asia,
from Japan who are in different situations.

It's a different trend there, a decreasing trend year on year for the past five years. That is pretty
worrying. In 2019, you can see that Ford was able to keep a slightly positive operating income while Nissan
was slightly below zero.

But I wouldn't say that Ford did a much better job than Nissan and both are in very dangerous
situations. Any slight movement in the volume of sales is going to put them at a loss. And we're likely to see
huge volatility in their profits in the upcoming years.
And that's an interesting measure to look at because it enables us to challenge the performance.

What happens? Dear management team, could you tell us what happened? Did we not sell okay? Do customers not like our products? Do we not manage to sell for high enough a price? Do customers not recognise the value we are
delivering? Is our production equipment too large, too old, not efficient enough?
How do our costs compare to the other OEMs? What happens? There are plenty of questions that
can be raised here.

Some would be strategic, some would be more operational, but there are plenty of issues to
address here.

I'd really like to learn more about those two companies. I'm keen on reading their annual
presentations to learn more about that and how they plan to turn around the situation.
In the following minutes, I invite you to do the same type of exercise on your own in an industry
sector of your choice with the companies of your choice.

Pick up at least one company and try and find on the web, their financial statements and do
compute their operating margin.

Ideally, if you could look at its evolution over a few years and against competition, you will learn a
lot.

Please share your findings with your peers so that all of you can have access to different
profitability levels in different industry sectors and different countries.