JM Financial suggests “due consideration to be given to revenue chararcteristics—competitive moats, network effects, gross margin profile, growth rate, capex/working capital requirements and recurring nature of business”.
“Whereas these revenue characteristics will help understand why certain companies should trade at higher multiples compared to others, gross profit multiples can be used for comparing the new-age companies as it is a simple way to remove the impact of differing revenue recognition approaches,” it said.
Gross margin, according to JM Financial, is the simplest indicator of quality of revenue. “Evaluating companies on gross margin also takes away the impact of gross merchandise value/revenue growth coming at the cost of poor commissions/buy-sell margins. While Nykaa trades at a 60% premium compared to Zomato on revenue multiple basis, the variance is much steeper on gross profit multiple basis at 200%+.”
Also, marginal incremental profitability should be actively tracked to understand the bottom line impact of revenue growth. “Companies that can grow predictably in a sustainable fashion with strong marginal incremental profitability are the ones that should always be trading at premium revenue multiples.”