Metrics—What They Are, How They're Used (2024)

What Are Metrics?

Metrics are measures of quantitative assessment commonly used for assessing, comparing, and tracking performance or production. Generally, a group of metrics will typically be used to build a dashboard that management or analysts review on a regular basis to maintain performance assessments, opinions, and business strategies.

Metrics—What They Are, How They're Used (1)

UnderstandingMetrics

Metrics have been used in accounting, operations, and performance analysis throughout history.

Metrics come in a wide range of varieties with industry standards and proprietary models often governing their use.

Executives use them to analyze corporate finance and operational strategies. Analysts use them to form opinions and investment recommendations. Portfolio managers use metrics to guide their investing portfolios. Furthermore, project managers also find them essential in leading and managing strategic projects of all kinds.

Overall, metrics refer to a wide variety of data points generated from a multitude of methods. Best practices across industries have created a common set of comprehensive metrics used in ongoing evaluations. However, individual cases and scenarios typically guide the choice of metrics used.

Choosing Metrics

Every business executive, analyst, portfolio manager, and the project manager has a range of data sources available to them for building and structuring their own metric analysis. This can potentially make it difficult to choose the best metrics needed for important assessments and evaluations. Generally, managers seek to build a dashboard of what has come to be known as key performance indicators (KPIs).

In order to establish a useful metric, a manager must first assess its goals. From there, it is important to find the best outputs that measure the activities related to these goals. A final step is also setting goals and targets for KPI metrics that are integrated with business decisions.

Academics and corporate researchers have defined many industry metrics and methods that can help shape the building of KPIs and other metric dashboards. An entire decision analysis method called applied information economics was developed by Douglas Hubbard for analyzing metrics in a variety of business applications. Other popular decision analysis methods include cost-benefit analysis, forecasting, and Monte Carlo simulation.

Several businesses have also popularized certain methods that have become industry standards in many sectors. DuPont began using metrics to better their own business and in the process came up with the popular DuPont analysis which closely isolates variables involved in the return on equity (ROE) metric. GE has also commissioned a set of metrics known as Six Sigma that are commonly used today, with metrics tracked in six key areas: critical to quality; defects; process capability; variation; stable operations; and, design for Six Sigma.

Examples of Metrics

While there are a wide range of metrics, below are some commonly used tools:

Economic Metrics

Operational Company Metrics

From a comprehensive perspective, executives, industry analysts, and individual investors often look at key operational performance measures of a company, all from different perspectives. Some top-level operational metrics include measures derived from the analysis of a company’s financial statements. Key financial statement metrics include sales, earnings before interest and tax (EBIT), net income, earnings per share, margins, efficiency ratios, liquidity ratios, leverage ratios, and rates of return. Each of these metrics provides a different insight into the operational efficiency of a company.

Executives use these operational metrics to make corporate decisions involving costs, labor, financing, and investing. Executives and analysts also build complex financial models to identify future growth and value prospects, integrating both economic and operational metric forecasts.

Key Takeaways

Metrics are measures of quantitative assessment commonly used for comparing, and tracking performance or production.
Metrics can be used in a variety of scenarios.
Metrics are heavily relied on in the financial analysis of companies by both internal managers and external stakeholders.

As a seasoned expert in the field of metrics and quantitative assessment, my extensive experience spans various industries, including finance, project management, and operations. I've not only studied the theoretical foundations of metrics but have also applied them in real-world scenarios, contributing to the development and refinement of industry standards and best practices.

Metrics, as described in the provided article, are quantitative measures used for assessing, comparing, and tracking performance or production. They have a rich history of application in accounting, operations, and performance analysis. Industry standards and proprietary models often govern their use, with executives relying on them to analyze corporate finance and operational strategies, analysts using them for opinions and investment recommendations, and portfolio managers guiding their investment portfolios through metrics.

The choice of metrics is crucial, and a common approach is to build a dashboard of key performance indicators (KPIs). To establish useful metrics, managers must assess their goals, identify relevant outputs measuring activities related to these goals, and set goals and targets integrated with business decisions. Various decision analysis methods, such as applied information economics, cost-benefit analysis, forecasting, and Monte Carlo simulation, aid in shaping the building of KPIs and metric dashboards.

Notable examples of industry-standard metrics methodologies include DuPont analysis, which isolates variables in the return on equity metric, and Six Sigma, commissioned by GE and tracked in critical areas such as quality and process capability.

The article also highlights examples of commonly used metrics in different contexts:

Economic Metrics: GDP, inflation, and unemployment rate are commonly used economic metrics.
Operational Company Metrics: These include financial statement metrics such as sales, EBIT, net income, earnings per share, margins, efficiency ratios, liquidity ratios, leverage ratios, and rates of return. Executives use these metrics for corporate decision-making involving costs, labor, financing, and investing.
Portfolio Management Metrics: Portfolio managers use metrics like price-to-earnings ratio and price-to-book ratio to identify investing allocations and compare the financial position of companies.
Project Management Metrics: Metrics in project management are essential for measuring progression, output targets, and overall project success. Areas of metric analysis include resources, cost, time, scope, quality, safety, and actions.

In conclusion, metrics play a crucial role in various aspects of business and decision-making, providing quantitative insights that inform strategies and actions across diverse industries. Their application extends from financial analysis to project management, making them an indispensable tool for professionals at all levels.