Reliable Metrics and KPI's
written by Joe Diaz
Investors crave consistency. They are looking for operating consistency and consistency in communications with the companies in which they allocate capital. Investors want to be able to track a company’s progress. One of the best ways for them to do that is to know the relevant metrics that indicate the true measure of a company’s performance. GAAP accounting is an important component in accurately assessing the performance of a company, but it is not the only component. It is very “literal” and does not provide the perspective, or the nuance, if you will, to ascertain the true operating performance of a company, in a quarter, on a year-to-date basis, or annually.
There is a reason for the quarterly financial results conference call. That proactive interaction with management is where investors gain the perspective that GAAP doesn’t provide. Perspective contributes to investors buy or sell decisions; or to wait for a better time to get in or get out of the stock. They look for cues: the inflection of the CEOs voice during the prepared remarks, the confidence in the CFOs answer to specific financial questions, the management team’s ability to respond authoritatively on strategy and to confront difficult questions when the operational results are not as expected. These “signs” can be just as important as revenue growth, margins, or EPS.
An important component in the communications process is METRICS.
Each type of operating model has its own critical metrics that tell “the Street” whether a company is making progress on their strategic goals. In some cases, it is EBITDA growth; in others, margins; annual recurring revenue (ARR), etc. GAAP is not always the most accurate indicator of a company’s performance. Depending on the company, there are certain metrics that provide investors a reasonable snapshot on what was achieved on a quarterly, year-to-date and annual basis in addition to the straightforward GAAP results. Management can make it easier on investors to initiate positions or maintain those positions by providing the meaningful metrics that investors should focus on in evaluating their respective companies.
Investors recognize there are overarching conditions in evaluating a company’s performance on an ongoing basis – macroeconomic conditions; general market conditions; the recent worldwide COVID pandemic; the resulting supply chain issues; labor shortages, etc. The snapshot that metrics provide serve as a good starting point to continue the evaluation of a company’s performance. They give institutional investors a directional indicator of the progress of the company. It gives them the sense that they can “connect the dots.” Then, the real work begins to review the financial documents, to capture the tone of management during their quarterly conference calls and follow-up one-on-one calls.
Extenuating circumstances, one-time events – either positive or negative – can also skew metrics and overall results. Metrics are not the end all in evaluating a company. However, they can play an important function in keeping investors interested. At the end of the day, small-cap companies must maintain the interest in their existing investors and must develop that interest in potential new investors. That is what drives shareholder value, which is why boards of directors hire management that can deliver operational performance and successfully interface with “the Street” to drive value.
The reality is that we want investors to SELL their stock – at a sizable profit.
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