If you are keen to attract investment, you should pay particular attention to how you report on performance metrics. Investors may assess metrics from a number of sources including: the annual report, investor presentations, preliminary announcements and sustainability reports, as well as other communications.
The Financial Reporting Council has issued a helpful paper on the reporting of performance metrics to assist companies in developing and reporting metrics which are useful to, and could attract, investors.
The report is set against the backdrop of a regulatory focus on the reporting of performance following the guidance on Alternative Performance Measures issued by the European Securities and Markets Authority.
What types of performance metrics are there?
Generally, metrics can be classified as:
- Numbers that are prepared in accordance with GAAP (eg IFRS) and presented in the financial statements.
- Metrics derived from GAAP numbers but are:
- not defined in GAAP (eg EBITDA);
- derived by adjusting GAAP numbers (eg adjusted operating profit or underlying diluted EPS);
- a mixture of a GAAP number with another number (eg same-store-sales or revenue-per-customer); or
- based on a different measurement basis (eg risk adjusted return on equity).
- Non-monetary metrics eg employee engagement results, brand awareness, customer satisfaction scores, market share and environmental measures.
What do investors use performance metrics for?
Different groups of investors may utilise different metrics based on their own needs and position in the investment chain. Generally, investors use metrics for:
- Insight into a company’s strategy and how it is performing against that strategy.
- Understanding how a company has performed in order to assess its future prospects including the quality and sustainability of the reported performance.
- Assessing management’s credibility. The metrics chosen, how they are reported, and whether or not the information is reported in a way that investors consider to be fair, balanced and understandable are central to this assessment.
- Assessing whether management is appropriately incentivised. Is there a clear link between the metrics that drive the business model and strategy, and the remuneration policy?
What do investors need from performance metrics?
Preparers should consider the needs of investors when developing and reporting metrics, ensuring that metrics are sufficiently well-explained to provide:
- Clarity on why a company is using specific metrics and what performance they are trying to demonstrate.
- Clarity on how the metrics are calculated and defined.
- An overview of how the metrics have been developed and monitored.
- An understanding of the level of scrutiny to which the metrics are subject (including Board, Audit Committee, internal and external assurance processes).
- If the metrics have changed, been calculated differently from previous years or reported differently in different reporting formats, an explanation of why.
- Consistency with an industry standard or the company’s close competitors; or an explanation of why they are different and more appropriate.
- A track record, preferably over five years.
- Explanation of the context of the metrics ie company performance and market position.
- Explanation of what performance the metrics are trying to achieve in the future.
If you would like further information or assistance with developing useful performance metrics, please speak to your usual RSM contact.