IPO KPIs

KPIs stand for Key Performance Indicators. KPIs are quantitative measures of a company that provide information about the course of business and performance over a certain period of time. KPIs are very important for the company as well as for investors and other stakeholders.

KPIs help the company to recognise its strengths and work on areas of improvement. KPIs help investors to make investment decisions. There are different types of KPIs that provide information about a company's profitability, efficiency, liquidity and operational performance. It is important to know that no single KPI can tell you whether a company is doing well or not. One should know what each KPI means and analyze each KPI to better understand the company.

Let us take a look at some of the common key performance indicators of a company:

1. Revenue from operations

Revenue from operations is the income that a company generates from its primary business activity. It is the amount that a company earns from the sale of its products or services. Revenue from operations excludes other sources of income such as interest, investments, or one-time gains.

This key figure provides information about a company's sales performance. Revenue from operations is also known as the company's top line.

It is a starting point for any analysis, as it is directly related to turnover. A company is considered successful if its turnover is growing. Therefore, one should track the percentage growth of revenue to assess the company’s revenue growth.

Let us take the example of Mukka Proteins Limited

Points to Note:

• Increase in growth % - Good sign.
• Consistent growth % - Caution as there is no improvement in sales growth.
• Decrease in growth % - Not a good sign.

2. Profit After Tax

Profit after tax (PAT) is the net profit/income remaining to the company after all expenses and taxes have been paid. PAT is an important indicator that reflects the financial health of a company. It is the bottom line in a company’s profit and loss statement. The higher the PAT, the better the company can manage its expenses and is said to have a good profitability position.

PAT is calculated by subtracting tax expenses and all other expenses from total income (i.e. income from operations plus other income)

A positive PAT indicates that a company is making profits, while a negative PAT means that the company is making losses.

Points to Note:

• Increase in PAT – Very Good sign.
• Consistent PAT- Good sign.
• Decrease in PAT - Caution.
• Sudden increase/decrease in PAT in between- Can be one-time. Look for the reason

3. Profit After Tax Margin (PAT Margin)

PAT Margin is the percentage of PAT compared to a company's revenue from operations i.e. sales. PAT Margin shows the company’s ability as to how much of the company sales are actually converting into profits. The higher PAT margin reflects that the company can manage the costs and taxes very well and is a positive indicator of the firm's financial health check.

Points to Note:

• Higher the PAT Margin – Very Good sign.
• Lower PAT Margin- Good sign.
• Negative PAT Margin - Caution.
• Sudden increase/decrease in PAT in between- Can be one-time. Look for the reason.

4. Return on Capital Employed (RoCE)

The return on capital employed is a profitability indicator that assesses a company's performance.

The ROCE ratio provides information about a company’s ability to generate profits on the employed capital. It is an important indicator for assessing the return on total invested capital. It is a benchmark for calculating the target return for investors. ROCE is particularly important for issuers of IPOs as it provides information on how effectively the company uses its capital to generate profits.

An investor would prefer to invest in a company that generates a higher return on invested capital compared to others. ROCE is calculated by dividing the operating profit by the capital employed i.e. total assets less current liabilities.

ROCE helps to assess the competition between two companies in the same industry and to choose the better company. If there are two companies A and B with capital employed of Rs 17.5 lakhs and 33 lakhs respectively and operating profit of Rs 4 lakhs and Rs 6 lakhs respectively, the ROCE for both is (4/17.5)*100= 22.8% and (6/33)*100= 18.18% respectively. So of the two companies, Company A has a higher ROCE even though it has a lower profit and is therefore a better choice for an investment.

In general, the higher the RoCE, the better. Generally, companies with a ROCE of at least 15-20% are considered good. However, ROCE varies from sector to sector.

Points to Note:

• Increasing RoCE – Very Good sign.
• Consistent RoCE- Good sign.
• Decreasing RoCE - Caution.
• Sudden increase/decrease in PAT in between- Can be one-time. Look for the reason.

5. Return on Equity (RoE)

The return on equity is also a profitability indicator used to evaluate the company's performance. It provides information on the company’s ability to generate profits with its equity. The difference between RoE and RoCE is that RoCE is based on total capital including debt, while RoE is based only on equity.

RoE is calculated by dividing the company’s net profit by the shareholder’s equity.

RoE also helps with investment decisions. In general, a return on equity of 15% or more is considered good. However, this again depends on the industry. Therefore, one should check the return on equity of similar companies in the industry to get a better idea.

The higher the return on equity, the better. But one should also consider other factors. Example: Company A has earned a net profit of Rs 15 lakhs and has an equity of Rs 50 lakhs, so the return on equity would be 1500000/5000000 = 30%. However, there is a similar company which has also earned a net profit of Rs 15 lakhs and has raised capital of Rs 30 lakhs through equity and Rs 20 lakhs through debt, so its return on equity is 1500000/3000000=50%. Though the return on equity of Company B is higher, it has also increased its debt burden. Therefore, it is important to evaluate other factors apart from return on equity and check whether the equity is not decreasing, whether the high debt of the company is okay or not, and whether it has experience in the industry as new companies may take time to earn returns, whether the decreasing net profit is due to one-time high investment etc.

Points to Note

• Increasing RoE – Very Good sign.
• Consistent RoE- Good sign.
• Decreasing RoE - Caution.
• Sudden increase/decrease in RoE in between- Can be one-time. Look for the reason.
• Check for debt components as well.

6. Return on Net Worth (RONW%)

The return on net worth (RONW) for an IPO issuer is a financial ratio that measures the company's profitability in relation to its net assets, which include equity and reserves. It indicates how effectively the company is generating profits based on the total value of its assets and liabilities.

To calculate your net worth, you subtract your total liabilities from your total assets.

Return on Net Worth is calculated by dividing the Net Income of the company by the shareholders' equity.

Point to Note:

• Increasing RoNW – Very Good sign.
• Consistent RoNW- Good sign.
• Decreasing RoNW - Caution.
• Sudden increase/decrease in RoNWin between- Can be one-time. Look for the reason.

7. Debt Equity Ratio

The debt equity ratio provides information about a company's capital structure. In simple terms, it shows how much a company relies on debt and how much on equity to cover its financing requirements.

A high debt-equity ratio is considered risky as it indicates that the company relies on more debt than equity, which can lead to pressure in meeting its debt obligations. Although an ideal leverage ratio is between 1 and 1.5-2, it depends on the industry. A capital-intensive industry such as finance or manufacturing may have a leverage ratio of more than 2, which is normal for their business. In some cases, a high debt equity ratio also indicates that a company has a good credit rating and is therefore able to raise debt capital.

The debt to equity ratio is calculated by dividing the company’s total borrowings/debt by its total equity.

Points to Note:

• Debt of Equity ratio of 1-1.5 is good.
• Some industries like finance, and manufacturing have high Debt to Equity ratios. Thus an ideal ratio will depend on the company’s sector.
• A decreasing trend in debt to equity ratio is a good sign.
• An increasing trend in debt-to-equity ratio is a sign of caution.

8. Earnings per share (EPS)

Earnings per share (EPS) is an important profitability indicator that shows how much profit a company generates per share. It is an important metric used by investors to evaluate a company's performance. It indicates the proportion of a company's profit allocated to each outstanding share.

EPS is calculated by dividing net profit, i.e. profit after tax, by the total number of shares outstanding.

There are two EPS calculated in each offer document. One is the diluted EPS and the other is the basic EPS. The main difference between basic and diluted EPS is the change in the denominator, i.e. the number of shares in the EPS calculation. In the case of diluted EPS, the number of shares increases by the conversion of convertible securities into shares. On the other hand, basic EPS does not take into account the effects of potentially dilutive securities. Diluted EPS is more conservative than basic EPS.

Points to Note:

• Increasing EPS = Very Good.
• Consistent EPS = Good
• Decreasing EPS = Caution

9. Price to Earning Ratio (PE Ratio)

The P/E ratio of a company is an important indicator used by investors and analysts to determine the valuation of a company. The P/E ratio helps to recognise whether a share is undervalued or overvalued.

The P/E ratio is calculated by dividing the current share price by the earnings per share (EPS). It indicates how much an investor is willing to pay for each Re.1 of a company’s earnings. For example, if a company's P/E ratio is 15, it means that the investor is willing to pay Rs. 15 for every Re.1 that the company earns.

Analysts derive the forward P/E taking into account the estimated earnings based on their research and input from management. In some cases, the forward PE is also calculated based on annualized earnings to have a fair idea.

An ideal P/E ratio depends on the company's industry. Generally, an average P/E ratio is between 20-25. The lower the P/E ratio, the better it is considered. If the P/E ratio is very high, the stock is considered overvalued. Although this is the general norm, a higher P/E ratio can also mean that the company's future is promising, so investors do not mind paying a high price today. Therefore, one should check the P/E ratio of the industry and also compare the P/E ratio of the peer companies.

For example, if there are two companies in the same industry with similar characteristics and the P/E ratio of Company 1 is 35 and Company 2 is 29, it makes sense to invest in Company 2.

Points to Note :

• Lower PE Ratio - The stock is considered reasonably priced.
• Higher PE Ratio - The stock is considered over priced.

10. EBITDA Margin

The EBITDA margin is a profitability ratio that provides information on the percentage of earnings a company can generate at the operating level. EBITDA is earnings before interest, taxes, depreciation and amortization. The EBITDA margin gives an indication of the company’s efficiency in managing expenses at an operational level.

To calculate the EBITDA margin, we must first calculate EBITDA. EBITDA is calculated by adding finance costs, tax expense and depreciation and amortization expense to profit after tax for the period. The EBITDA margin is the percentage of EBITDA compared to the company's revenue from operations.

If the company’s EBITDA margin is 15%, it means that from sales of Rs. 100, the company has spent Rs. 85 (100-15) towards expenses and earned Rs. 15 from operations.

Generally, a company with an EBITDA margin of 10% and above is considered good.

Points to Note:

• Increasing trend in EBITDA - Good sign
• Decreasing trend in EBITDA - Caution

11. Price to Book Value

The price- to-book ratio (P/B ratio) is a valuation ratio, commonly known as PB or P/BV ratio, that helps to assess whether a share is undervalued or overvalued. The price-to-book ratio shows the relationship between the book value of assets/equity in the balance sheet and the market value of equity.

The PB ratio is calculated per share and is calculated by dividing the market price of the share by the net asset value per share. The net asset value (NAV) is the difference between the total assets and the total liabilities. The NAV is then divided by the number of shares outstanding to arrive at the NAV per share. The NAV is generally stated in the offer documents/IPO advertisements in newspapers.

The PB ratio shows what the actual value of the assets is as against what the market perceives it as. A higher PB ratio indicates that a share is overvalued. In general, stocks with a PB ratio of 1-3 are considered undervalued. However, the interpretation of an ideal PB depends on the company's industry.

Mukka Proteins PB ratio : 4.78 (based on Mar’23 NAV)

Points to Note:

• Generally, the latest year NAV is given, thus one cannot track the trend PB ratio. Investors can assess the valuation based on the latest NAV and offer price.
• PB Ratio of 1-3 - Undervalued stocks
• PB Ratio of 3-15 - Fairly Priced stock
• PB ratio of more than 15 is an overvalued stock
• The above is a generic view and one should compare the P/BV of competitors and the industry.

KPI Analysis

To understand the above metrics, we have taken the example of Mukka Protein's KPI. Let us see what the above KPIs tell us about Mukka Proteins. Click here to compare the Mukka Proteins KPIs with its industry peers.

Thus, based on the analysis of financial KPIs, it is good to apply for Mukka Proteins. However, one must also check other factors like the company review, sector growth, object of the issue, management, merchant banker to make an informed decision of investment or not.

Key Takeaways

KPIs help you to evaluate a company's performance and determine its profitability and efficiency. Key Performance Indicators help investors decide whether or not to invest in an IPO. In order to analyze a company, it is important to note that none of the key figures can be used in isolation. One should examine all the metrics, study their trend and compare them with their industry peers to get a true picture.