Page 52 - BANKING FINANCE FEBRUARY 2016 ONLINE
P. 52
FEATURE
HOW TO MEASURE FINANCIAL
PERFORMANCE
M ost people go through the defined from 1st April till 31st March. return for a period longer than a year,
expenses at the end of the This is the start of a business year for adjust the actual return for the period
year and try to figure out companies and the government. on the basis of annualized return. This
the performance of their Hence, many financial decisions will help in comparing returns across
investments for the become effective at the beginning of securities and asset classes.
particular year. However, there are a financial year. Interest payable on
different methods of measuring financial government savings schemes such as It also helps in showing the historical
performance. Here are some common Public Provident Fund and Employees' return trend. This adjusted annual
return terms that one should know. Provident Fund is effective for a return is referred to as compounded
financial year. annualized growth rate or CAGR. It
Year-to-Date (YTD) shows the average annual growth rate
Even for market-linked securities, or return for a security over a specific
This is the return earned from the start financial year performance is period, for more than year. It is useful
of a calendar year to any point during important, so one can match stock in comparing returns for most market-
the year. For example, if on 5 October performance as well for this time linked securities, and also against
you want to know the YTD return, you period. benchmarks.
will need to calculate the return from
1 January of the year till 5 October. Moreover, for the purpose of tax Year-on-Year (Y-O-Y)
This type of return calculation helps calculation like capital gains on
when assets or securities are marked securities or interest earned on fixed This is not so much a return calculation
to market or there is daily price deposits, you will have to consider the period as it is an evaluation of returns
variation. The YTD returns can be for financial year for calculating returns. or any other event compared over two
any period less than 12 months. different annual periods. This is useful
Annual Return to compare performance of a
Financial Year Return company. For example, just saying that
Annual return refers to returns earned ABC Ltd reported a 10% net profit
In India, the financial year is usually in one year. This can be the entire growth in the second quarter is not
enough. When you specify that the
calendar year or financial growth is y-o-y, it means the net profit
year or any other one-year in the second quarter has grown 10%
period. For instance, it can be compared to the net profit in the same
stock returns measured from quarter last financial year.
1 January 2014 to 31
December 2014, or from, say, In context of financial securities, y-o-y
20 April 2014 till 19 April returns are like annual returns for a
2015. defined one-year period. (Source:
Mint)
When you want to measure
52 | 2016 | FEBRUARY | BANKING FINANCE
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