A performance measurement is a mechanism used to determine whether a given individual, project or investment is performing as it should. In other words, it is a scale or test used to determine whether things are going right. The simplest example of a performance measurement exists in the grades that students in school get: a student who receives an A is judged to have performed well, and a student who receives an F is judged to have performed poorly.
In finance, a performance measurement is used to determine whether an investment is a good deal. Investors look at various metrics or measurements to evaluate whether to put their money into a given stock, bond or mutual fund. The measurements are an indicator to these investors as to whether the investment has done well in the past and will continue to do well in the future.
There are several mechanisms used to measure performance in the financial sector. For example, a stock may be measured by its price to earnings ratio. This is a ratio in which the price per share of the stock is compared to the cost of the stock. The price to earnings, or P/E, ratio from several different stocks can be compared to assess whether one stock is a better deal than the other.
Return on equity and return on investment are other important performance metrics within the investing field. Return on investment refers to how much a person's money would have made had he put it into a given investment. Return on equity refers to how much profit a company made in light of how much money it spent.
These metrics are important as performance measures because they allow a stock or mutual fund to be compared to other investment opportunities. For example, to compare a stock that costs $1 US Dollar (USD) per share and a stock that costs $10 USD per share, some metric must be used that allows the stocks to be compared on equal footing. An investor can use these objective measurements to determine if an investment performs as expected and how its performance compares to other investments within the industry and in the market as a whole.
Just like when a student receives a grade, a performance measurement can help companies assess whether a project did well or whether an employee did well. For example, if a given investment broker's stock picks generally perform better than another broker's picks, the company will want to know that. It must use an objective performance measurement system to compare the two employees to determine whether one or both is doing a good job relative to the other.
