Companies use key performance indicators to evaluate their business performance in critical areas. Comparisons with peers or market leaders can give an indication of areas to focus on for improvement, or areas to continue supporting. We’ve broken down our Financial Insights Reports into seven areas of analysis.
Seven Areas of Analysis:
- Valuation Comparisons
- Revenue Comparisons
- Expense and Cost Comparisons
- Employee Productivity Comparisons
- Profitability Analysis Comparisons
- Working Capital Comparisons
- Cash and Balance Sheet Comparisons
These seven areas constitute the major indicators of a company’s value and are areas that should be focused on to drive the performance and value of your company. Within each area of analysis, we have selected the critical metrics to give you a scorecard for your company and your industry.
A significant variance between your company’s performance and industry benchmarks is not necessarily good or bad; it may indicate that deeper analysis is required to understand the difference.
This data is taken as of the last day of the time period selected and is calculated by the number of shares outstanding times the share price. Generally, this metric gives an indication of how the investor market values a company.
Revenue to Market Cap Multiplier
This metric indicates how the investor market values a company in relation to the revenue, and often, the revenue growth, of a company.
Earnings per Share and Price to Earnings Ratio
Earnings per Share is an indication of the profitability of a company. The Price to Earnings ratio indicates what investors expect for earnings growth in the future. In general, a high Price to Earnings Ratio suggests that investors are expecting higher earnings growth in the future compared to companies with a lower Price to Earnings Ratio. It is useful to compare the Price to Earnings Ratio for companies in the same industry, as some industries generally have high growth, and others average much lower growth overall.
Mean Analyst Earnings Estimate
Indicates what analysts think a company will earn in the coming year – this data is always provided for the upcoming fiscal year, regardless of the time period of the report selected.
This data reflects what a company recognizes for revenue on a GaaP basis. It is important to compare companies that recognize revenue in a similar way in order to have apples-to-apples comparisons. For example, a subscription sales model company will recognize revenue ratably over the period of the subscription, as compared to companies that recognize all revenue at the point of sale.
Annual Revenue Growth and 3 year CAGR
These metrics indicate how a company is growing its revenue base and whether it is managing to do this consistently. Different industries have different average revenue growth rates, so it is important to compare these rates within an industry.
Deferred Revenue and Recognized Revenue plus Change in Deferred Revenue
Not all industries defer revenue, but for industries and business models that do, metrics involving deferred revenue can indicate future revenues. Some operational analysts also look at expense spending against recognized revenue plus deferred revenue as this may give a more “true” picture of the what expense level was required to produce sales, not just what is recognized in a given period.
Mean Analyst Revenue Estimate
is given for the upcoming full fiscal year, regardless of the period in the report.
Cost and Expense Comparisons
At OPEXEngine, we find that cost and expense levels typically change with the stage of growth of company. This means that not only is it important to look at industry benchmarks for costs and expenses, as different industries will have different benchmarks, but also to look at what average cost and expenses may be at different stages of growth. An early stage company will spend differently than a very large company in a mature market.
Cost of Goods and Services Sold (COGS)
The exact costs included in COGS will differ for various industries. COGS indicates the direct costs of production of goods and services sold by a company and is deducted from revenue to calculate gross margin.
Sales and Marketing Expense (S&M and SG&A)
Many companies do not specify their Sales and Marketing expense and combine it within Selling, General and Administrative Expense. S&M expense is the sum of all direct and indirect selling expenses and is an area closely examined by financial analysts for efficiency and productivity. It is valuable to compare S&M expense and SG&A expense for comparable companies of the same stage of growth in the same industry. It is also useful to see trends in S&M expense for high growth companies and for very profitable companies.
General and Administrative Expense (G&A)
The sum of expenses related to operating a business, not directly related to the production of goods and services. Most companies track and manage this “overhead” expense very closely. G&A expense can also be impacted by major corporate events, going public, acquisitions, major lay-offs of personnel, law suits and other activities that require a great deal of activity not directly attributed to the production of goods and services.
Research and Development Expense (R&D)
Any expense related to the research and development of a company’s products or services. Different industries have different benchmarks for R&D, and within an industry, high levels of R&D investment above the industry benchmark may indicate development of new products, or increased investment in an existing product due to problems or changes in technology.
Employee Productivity Comparisons
Labor expense is typically the largest single expense of any company, so comparisons of how much productivity other companies are getting from their labor investment are critical. Significant differences in employee productivity between an industry benchmark and your own company’s may indicate a need for deeper analysis of the difference.
Profitability Analysis Comparisons
Profitability metrics indicate different calculations of how much value has been created by the company. It is useful to track these metrics for over time (trend analysis), for competitors and peers (competitive analysis and industry analysis), and to look at how industry benchmarks compare to your own profitability metrics. Profitability metrics can show how effectively companies are applying their resources, and how much value they are creating beyond the cost of production.
Working Capital Comparisons
Working capital metrics allow a company to measure their cash “float” in terms of Accounts Receivables (AR) plus Inventory minus Accounts Payable (AP) to understand the amount of capital invested in the operations of the business. It is important for companies to compare their working capital metrics to like companies and peers within like industries as the working capital needs may differ dramatically against service based companies vs. manufacturing intensive based companies.
Cash Flow and Balance Sheet Comparisons
Cash flow and balance sheet metrics illustrate a company’s ability retain the cash that is generated in the operations of a business. A company can run the business at a loss for a long period of time but only run out of cash once. The importance to monitor and compare the cash flow and balance sheet metrics should be done in similar or like industries as the relative measurements in the report will be skewed in cash rich businesses/industries.