JM Financial suggests “paying close attention to revenue characteristics – competitive moats, network effects, gross margin profile, growth rate, capital/working capital requirements and recurring nature of business.”
“While these revenue characteristics will help to understand why some companies should be trading at higher multiples than others, gross margin multiples can be used to compare new-era companies, as it is an easy way remove the impact of different revenue recognition approaches,” it said.
Gross margin, according to JM Financial, is the simplest indicator of revenue quality. “Evaluating businesses on gross margin also eliminates the impact of growth in gross merchandise value/revenue at the cost of low commissions/buy-sell margins. While Nykaa trades at a 60% premium to Zomato based on the revenue multiple, the variance is much more pronounced based on the gross profit multiple at 200% and above. »
Additionally, marginal marginal profitability must be actively tracked to understand the impact of revenue growth on the bottom line. “Companies that can predictably grow sustainably with strong marginal profitability are those that should always trade at multiples of premium earnings.”