How to Track IT Stocks?

Investing in technology stocks can be both exciting and overwhelming, given the sector’s rapid pace of innovation and constant change. Understanding specific metrics can provide clarity and guide your investment decisions. 

In this article, we’ll delve into ten critical metrics that every tech investor should consider, explaining what they are, why they matter, and how to calculate them. By the end, you’ll be equipped to evaluate tech stocks more effectively and make informed investment decisions.

1. Total Contract Value (TCV)

Total Contract Value (TCV) represents the total revenue expected from a contract over its duration. This metric is vital for companies with long-term contracts, such as software-as-a-service (SaaS) firms. TCV provides insight into the company’s revenue stability and future cash flow.

To calculate TCV, simply sum up all the expected payments from a customer throughout the contract term. For example, if a SaaS company has a contract worth ₹5 lakh per year for 3 years, the TCV would be:

TCV= ₹5 lakh x 3 = ₹15 lakh

Investors should pay attention to TCV because it can indicate a company’s ability to secure and maintain customer relationships. A higher TCV suggests a stable revenue stream, while a declining TCV might signal customer dissatisfaction or increased competition.

Moreover, TCV can help investors gauge a company’s growth potential. If a firm consistently increases its TCV year after year, it may be poised for substantial growth. Thus, keeping an eye on TCV can provide valuable insights into a company’s future performance.

2. Operating Margin

Operating margin measures the percentage of revenue that remains after covering operating expenses. It indicates how efficiently a company manages its operations, which is crucial in the competitive technology sector.

To calculate the operating margin, use the formula:

Operating Margin = (Operating Income / Total Revenue) x 100

For instance, if a tech company has an operating income of ₹20 crore and total revenue of ₹100 crore, the operating margin would be:

Operating Margin = (₹20 crore / ₹100 crore) x 100 = 20%

A higher operating margin indicates better operational efficiency and cost management. For investors, a rising operating margin over time can signify a company’s increasing profitability, making it a more attractive investment.

Additionally, comparing operating margins among companies in the same industry helps investors identify which firms are performing better. It can serve as a benchmark for assessing operational effectiveness and guiding investment choices.

3. Free Cash Flow (FCF) and FCF Conversion

Free Cash Flow (FCF) measures the cash a company generates after accounting for capital expenditures. It reflects a company’s ability to generate cash that can be used for growth, dividends, or debt repayment.

To calculate FCF, use the formula:

FCF = Operating Cash Flow − Capital Expenditures

For example, if a tech firm has an operating cash flow of ₹30 crore and capital expenditures of ₹10 crore, the FCF would be:

FCF = ₹30 crore − ₹10 crore = ₹20 crore

FCF conversion measures how effectively a company turns its net income into free cash flow, calculated as:

FCF Conversion = (FCF / Net Income) x 100

For instance, if the net income is ₹15 crore, then:

FCF Conversion = (20 crore / 15 crore) x 100 = 133.33%

A positive FCF indicates that a company can invest in its growth or return capital to shareholders. Investors should look for firms with increasing FCF, as this demonstrates financial health and potential for future expansion.

4. Revenue Growth Rate

The revenue growth rate measures how quickly a company’s revenue is increasing over a specific period. It is a crucial indicator of a company’s expansion and market performance.

To calculate the revenue growth rate, use the formula:

Revenue Growth Rate = (Current Period Revenue−Previous Period Revenue / Previous Period Revenue) x 100

For example, if a tech company’s revenue increased from ₹50 crore to ₹60 crore, the growth rate would be:

Revenue Growth Rate = (₹60 crore − ₹50 crore / ₹50 crore) x 100 = 20%

Investors favour companies with strong revenue growth rates, as this indicates demand for their products or services and overall market health. A consistent upward trend can make a company an attractive investment opportunity.

Furthermore, comparing revenue growth rates across companies can help investors identify market leaders. A technology firm with a significantly higher growth rate than its peers might suggest it has a competitive advantage or a unique product offering.

5. Monthly Recurring Revenue (MRR)

Monthly Recurring Revenue (MRR) is a vital metric for subscription-based businesses, representing predictable monthly income. MRR helps investors understand a company’s revenue stability and future cash flows.

To calculate MRR, sum the monthly subscription revenues from all customers. For example, if a company has 100 subscribers paying ₹1,000 each month, the MRR would be:

MRR = 100 x ₹1,000 = ₹1,00,000

Investors should pay close attention to MRR as it provides insights into customer retention and satisfaction. A growing MRR indicates that customers are willing to continue their subscriptions, while a declining MRR can signal potential issues.

Additionally, monitoring changes in MRR can help investors identify trends and forecast future performance. A consistent increase in MRR often translates into long-term financial stability, making the company a more attractive investment.

6. Revenue Per Employee

Revenue per employee measures how much revenue each employee generates. This metric helps evaluate a company’s operational efficiency and productivity.

To calculate revenue per employee, use the formula:

Revenue Per Employee = Total Revenue / Number of Employees

For instance, if a tech firm generates ₹100 crore in revenue with 200 employees, the revenue per employee would be:

Revenue Per Employee = ₹100 crore / 200 = ₹50 lakh

A higher revenue per employee indicates better productivity and efficient resource utilisation. Investors should look for companies with increasing revenue per employee, as this suggests effective management and the potential for higher profitability.

Moreover, comparing this metric across companies can help investors identify which firms are operating more efficiently. A technology company with a higher revenue per employee than its competitors may have a competitive edge in the market.

7. Research and Development (R&D) Expenditure

R&D expenditure is crucial in the technology sector, as it reflects a company’s commitment to innovation and product development. High R&D spending often correlates with long-term growth potential as companies invest in creating new technologies, improving existing products, and staying competitive.

Calculating R&D expenditure is straightforward, as it involves summing up all costs associated with research and development activities. For instance, if a company spends ₹10 crore on R&D in a fiscal year, this figure directly impacts its financial statements and can signal its innovation strategy to investors.

Investors should closely monitor R&D expenditure trends. A company that consistently increases its R&D budget may be better positioned to innovate and adapt to market changes, enhancing its competitive edge. 

However, it’s crucial to balance R&D spending with operational efficiency, as excessive expenditures without corresponding growth can impact profitability.

8. Price-to-Sales Ratio (P/S Ratio)

The Price-to-Sales (P/S) ratio compares a company’s market capitalisation to its total revenue. This ratio helps investors assess whether a stock is overvalued or undervalued relative to its sales.

To calculate the P/S ratio, use the formula:

P/S Ratio = Market Capitalisation / Total Revenue

For instance, if a tech company’s market cap is ₹500 crore and its total revenue is ₹100 crore, the P/S ratio would be:

P/S Ratio = ₹500 crore / ₹100 crore = 5

A lower P/S ratio may indicate that a company is undervalued, while a higher P/S ratio could suggest overvaluation. Investors often compare the P/S ratios of similar companies to identify potential investment opportunities.

Moreover, tracking changes in the P/S ratio over time can help investors gauge market sentiment towards a company. If a tech firm’s P/S ratio is increasing, it may suggest growing investor confidence in its future prospects.

9. Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO) measures the average number of days a company takes to collect payment after a sale. This metric helps investors assess a company’s cash flow management and efficiency in collecting receivables.

To calculate DSO, use the formula:

DSO = (Accounts Receivable / Total Revenue) x 365

For example, if a tech company has accounts receivable of ₹15 crore and total revenue of ₹100 crore, the DSO would be:

DSO = (15 crore / 100 crore) x 365 = 54.75 days

A lower DSO indicates that a company is efficient in collecting payments, while a higher DSO can signal potential cash flow issues. In the technology sector, where subscription models and recurring revenue are common, maintaining a healthy DSO is critical.

Furthermore, understanding DSO in the context of the industry is essential. If a technology company consistently has a higher DSO than its competitors, it may need to reassess its credit policies or customer relations strategies. Keeping track of DSO trends can provide investors with valuable insights into a company’s financial health and operational efficiency.

10. Employee Attrition Rate

Employee attrition rate, or turnover rate, measures the percentage of employees leaving a company over a specific period. This metric is particularly significant in the technology sector, where talent is vital for innovation and competitive advantage.

To calculate the employee attrition rate, use the formula:

Employee Attrition Rate = (Number of Employees Who Left / Average Number of Employees) x 100

For example, if a technology firm had 200 employees at the beginning of the year and 20 left by the end, the attrition rate would be:

Employee Attrition Rate = (20 / 200) x 100

Investors should pay attention to employee attrition rates as they can significantly impact a company’s productivity and overall performance. High turnover can lead to increased hiring and training costs, decreased morale, and potential knowledge loss, all of which can hinder a company’s growth.

Moreover, a consistent or improving attrition rate can reflect positively on a company’s work environment and employee satisfaction. Firms that prioritise employee engagement, offer competitive compensation and foster a positive culture tend to have lower attrition rates, which can enhance long-term stability and growth potential.

Conclusion

Understanding these sector-specific metrics is crucial for anyone looking to invest in technology stocks. Each metric offers unique insights into a company’s financial health, operational efficiency, and growth potential. 

By closely monitoring these metrics, you can make more informed investment decisions and better navigate the dynamic world of technology stocks. Whether you’re a seasoned investor or just starting, incorporating these metrics into your analysis will provide a solid foundation for your investment strategy.

Remember, investing is not just about numbers; it’s about understanding the story behind those numbers and how they relate to the company’s long-term potential. Happy investing!

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