Tag: earnings

An illustration of a scientist looking up at a sort of monument to the the Big Five financial indicators, each perched on top of an Greek ionic pillar

In this post, we cover the ratios and other financial indicators Wall Street or other outside investors care about. These ratios can have a large impact on managerial decisions, because companies generally need to keep shareholders and investors happy and how well leadership does in this endeavor will impact stock price, which in turn influences the success of a company.

Here are the ‘Big Five’:

Revenue Growth
Earnings per Share (EPS)
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBIDTA)
Free Cash Flow (FCF)
Return on Total Capital (ROTC)

Let’s dive deeper.

Revenue Growth

This metric measures how fast the company is increasing its sales over a period of time. A high revenue growth rate indicates that the company has a strong demand for its products or services, and that it can scale up its operations. No investor is going to put money in a company where the value of their investment will stay flat or decrease over time (okay— well there are really sneaky things people do with the intention of decreasing their tax liability, but we’ll set that aside for now). If a company wants to be successful, they need to show the potential for growth.

Earnings per Share (EPS)

First up is EPS, which we encountered in the last post on Earnings Calls. This metric measures the profitability of a company by dividing its net income by the number of outstanding shares. EPS reflects the earnings potential of a company and its ability to generate returns for shareholders. All other things being equal, a growing EPS portends an increase in stock price. In an economic slowdown, companies will work hard to keep EPS up by reducing costs (not always great for the humans working at these companies). Shareholders can accept revenue decline, but are unhappy to see a decrease in EPS.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) margin

This metric measures how much of the revenue is left after deducting the operating expenses, excluding interest, taxes, depreciation and amortization. A high EBITDA margin indicates that the company has a high profitability and cash flow generation; it’s a good indicator of future operating cash flow. EBIDTA is also often used in valuing a business, as a company’s sale price is often negotiated as a multiple of EBIDTA.

Free Cash Flow (FCF)

This metric measures the amount of cash that a company generates from its operations after deducting capital expenditures. FCF indicates the financial flexibility of a company and its capacity to invest in growth opportunities, pay dividends, reduce debt, or repurchase shares. In this economic climate, it’s especially important, as a company with a healthy free cash flow can continue to fund its own growth even when investment dollars are hard to come by.

Note that EBIDTA and FCF can be used together to understand how well a company is doing at converting profit to cash, by taking the ratio of FCF divided by EBIDTA. When this ratio is low, it can mean that a company is trying to make EBIDTA look strong through gimmickry even while its cash flow is weak.

Return on Total Capital (ROTC)

This metric measures a company’s net income relative to the sum of its debt and equity value, or the efficiency with which invested funds are used in a business. Essentially it helps investors understand whether a business is generating a return high enough to justify their investment.

Finance for Scientists

More terms of interest

A few other metrics investors care about: Market Cap, Price-to-Earnings, and Shareholder Value

Market Cap

Market cap is simply the current stock price of a company multiplied by the number of shares outstanding, which appears on the balance sheet under Capital Stock. This metric shows a snapshot of what the company is worth to investors. Savvy investors like Warren Buffett will look at the ratio of the market cap to the ‘book value,’ or the value of the equity as shown on the balance sheet. It is said that Buffett tries to find and invest in companies that are trading at market cap close to or below their book value, as this situation may indicate that a company is undervalued (note: another thing that is said about Buffett is that he invests only in businesses he understands, so I would imagine there is an element of critical thinking in determining whether the business is actually undervalued… also note, this strategy is inherently banking on the market eventually recognizing the value of a company in the LONG TERM).

Price-to-Earnings

This metric is the current stock price divided by the prior year’s earning per share, and measures how much the market is willing to pay for each unit of earnings. Companies with higher ratios are considered to have high growth potential.

Shareholder Value

This term does not point to any single concrete metric— in fact, every ratio discussed could be said to indicate ‘shareholder value.’ But regardless of the specific definition, increasing shareholder value is important to everyone— not just shareholders. Lenders, investors, employees, customers all like to work with/invest in companies with high shareholder value, as these companies are better positioned to survive through hard times, keep employees employed, pay back their loans, and offer more pricing flexibility. Total shareholder return (TSR), the stock price appreciation plus reinvested dividends over a period, is one way of looking at shareholder value, and is sometimes considered the ultimate measure of a company’s achievement for shareholders over the long term. The formula for calculating TSR is { (current price – purchase price) + dividends } ÷ purchase price. Higher TSR results in greater capital gains for shareholders, stock price appreciation for employee-owners and potential for future success.

Long-term Investor Value Appropriation (LIVA)

A newer alternative metric is Long-term Investor Value Appropriation (LIVA). The idea behind LIVA is simple is to use historical data to estimate how much value a company either created or destroyed for its entire investor base. This measure is closely related to net present value (NPV), which estimates the value of a project based on expected future cash flow. NPV, which we will cover in the next post, is the gold standard for CFOs to decide which projects to invest in.

After the last several posts, hopefully you have a better understanding of how to understand financial ratios from management and investors perspectives (and how those perspectives come together in an earnings call).

In our next post we will talk about ways to understand ‘return on investment.’ In my mind, this is one of the most critical pieces of financial intelligence a scientific leader can acquire, as they will help you translate the value of the projects you want to advance into a framework your finance partners can more easily understand. So join the mailing list and stay tuned!

Illustration of a scientist listening to an office speaker phone. The phone has various speech balloons with icons to cover topics typically covered in a company earnings call

Your Company’s Quarterly Earnings Call: How to Make Sense of It All

By Kristin Gleitsman

On December 6, 2023

In Finance for Scientists

An earnings call is a quarterly touch-base for publicly-owned companies to provide an inside look at their performance and expectations for the future.

Earning calls are not legally mandated, so a company doesn’t have to have one. However, almost all publicly traded companies host quarterly earnings calls, because they provide an opportunity for the company’s management team to explain and contextualize their most recent financial results, and to offer a small glimpse into the future. It also often provides the opportunity for investment analysts to engage directly with the company’s executives.

These quarterly calls align with a company’s fiscal year, which may be different from the calendar year. For instance, our favorite exemplar company, Bio-Techne, closed its third quarter in the spring, for instance.

You can either listen to these calls live via webcast. Or you can listen to the recording on the company’s website a short while after the call occurs. Or you can read the transcript of the call, which is what I most often do.

Let’s walk through Bio-Techne’s third quarter earnings call to better understand the structure and content of a typical earnings call. A transcript of this call can be found here: https://seekingalpha.com/article/4599539-bio-techne-corporation-tech-q3-2023-earnings-call-transcript

Safe harbor statement

A call usually begins with a safe harbor statement, which lets everyone know that financial results may include predictions about the future that may not necessarily come true. This disclaimer limits the company’s liability if the predictions about the future differ wildly from what the future actually brings.

In this part of the BioTechne earnings call, they also state, “During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance.” Recall from our early posts (Part 2), that GAAP stands for Generally Accepted Accounting Practices and are standardized accounting practices utilized in ensuring that financials are accurately recorded and managed. The justification for reporting non-GAAP earnings is that large one-off costs, such as asset write-downs or organizational restructuring, should not be considered normal operational costs because they distort the true financial performance of a company. In other words, context.

Presentation and discussion of the financial results

Once the Safe Harbor statement is out of the way, the CEO (in this case Chuck Kummeth) kicks off with some opening messages that essentially boil down to a sales pitch for the company. Typically the CEO will present a narrative designed to coach listeners about the company’s position in the market and how they should think about the subsequent information. As a result, this section gives listeners a deeper understanding of how the company is positioning themselves in the market, and how optimistic they are about competitors and external market forces.

In the case of the Bio-Techne call, Chuck opens with all the things investors should be happy about (milestones, strong growth, etc), and then talks about “continued challenges of COVID in China, lower biotech funding and OEM destocking from supply chain disruption concerns last year,” but ends with an optimistic statement about these headwinds decreasing in the coming year. He also welcomes a new senior leader to the company, and then dives into performance by geography and end market, essentially fleshing out the themes he opened the call with.

Following the pattern of a typical earnings call, they then move into the detailed financial section, where the CFO takes the baton and dive into numbers that will give investors a sense of the relative health of the business and how that compares to past periods. In the Bio-Techne earnings call, the CFO (Jim Hippel) starts with the EPS (earnings per share). We’ll cover EPS in the next post on the investor Big Five financial ratios, but here’s a sneak preview:

EPS measures the profitability of a company by dividing its net income by the number of outstanding shares. EPS reflects the earnings potential of a company and its ability to generate returns for shareholders. All other things being equal, a growing EPS portends an increase in stock price. In an economic slowdown, companies will work hard to keep EPS up by reducing costs (not always great for the humans working at these companies). Shareholders can accept revenue decline, but are unhappy to see a decrease in EPS.

Similar to the opening business statements, Jim starts with an overall perspective, and then goes through the financials from various geographies and business lines. At several points, he refers to ‘unfavorable foreign exchange’ as a headwind (to refresh your memory on how exchange rates can impact a life sciences company, see Part 12).

Q&A

The final, and probably most interesting, section on an earnings call is the Q&A, and it is usually the longest part of the call. The host company can call upon analysts in their preferred order, prioritizing the most relevant individuals and deprioritizing the rest. Some investors will consider the tenor of how an earnings call unfolds, paying close attention to how leadership explains key pieces of information and how they navigate analyst questions at the backend of the call.

One interesting exchange in this section was from Dan Leonard from Credit Suisse who asked, “I want to make sure I understood your summary comments appropriately. Did you say that Bio-Techne would return to double-digit growth in fiscal 2024?”

For context, the summary comments from the CEO included: “Through it all, and as Q3 demonstrated, our growth platforms are still winning with double-digit growth. As we enter Q4, some of the headwinds should diminish, especially in China, but some are likely to remain, namely the OEM destocking and smaller biotech rationalize spending.

Looking further ahead into fiscal year 2024, these remaining headwinds should further diminish a double-digit revenue increases we see in our strategic growth platforms to once again be reflected in our headline numbers. In the meantime, we expect Q4 overall momentum to continue to improve from Q2 and Q3 with an overall growth rate likely similar to how we started the fiscal year in Q1.”

The issue around OEM destocking comes up several times in the Q&A and warrants some additional context. OEM will be a term for those more connected with the manufacturing world- it stands for original equipment manufacturer, or an organization that makes devices from component parts bought from other organizations. Destocking is just what it sounds like- to reduce the amount of stock/inventory held. So OEM destocking here means that BioTechne’s OEM customers are cutting back on the inventory they are buying, which is obviously not great for BioTechne.

Let’s dig a bit deeper into the macro environment underlying this destocking trend. Pre-pandemic many companies tilted towards ‘JIT’ (just in time) inventory management practices- there are many reasons this practice is attractive for a company’s financial position (in the extreme: imagine how your cash flow statement looks like if you can sell and receive payment on inventory before you have to pay the vendors from which you bought the parts, because you’ve negotiated amazing terms- Net 90, for instance). But there is no free lunch, and JIT comes with risks to a company’s resilience, and during the pandemic massive supply chain disruptions made that risk very apparent. The upshot is that many distributors moved away from JIT and stocked up on inventory. In addition, many businesses diversified, strengthening their supplier base and giving them increased optionality with qualified sources for materials. So now with the pandemic now officially over, distributors are feeling more confident in ‘destocking’ a bit, or drawing down on that inventory. But it’s not only that, there are market pressures driving this destocking behavior as well. As we all know from the last 14 parts of this series, destocking will lead to an increase in operating cash flow. With debt markets enduring higher interest rates for at least the foreseeable future, CFOs are turning to alternative sources of capital, i.e., no one wants to borrow money at high interest rates if they don’t have to, so turning existing stock into products without replenishing it as quickly provides a convenient route to generate cash. This strategy may be great for the companies doing the destocking, but it’s not so great for the company’s selling the inventory that is now being destocked. Thus the BioTechne situation.

Okay, so with that context, what was the BioTechne’s response?

First the CFO chimes in, “Well, we’re in the process of building our plan right now for next year, right? What I was trying to indicate in my closing remarks was that if you take out the very isolated events OEM destocking. China, as an example, the ExoTRU deal and the rest of our business collectively is at double digits already. And our key growth programs, which are going to carry us to $2 billion and beyond are also all growing well in the double digits. And so it suggests that we get past these headwinds in fiscal year 2023, during fiscal year 2024, this underlying double-digit growth was seen not only in our core but definitely in our growth programs, growth platforms we’ll start to once again resonate and you’ll see it in the overall company results. And that’s our goal.”

And then the CEO pipes up: “Let me put a little ribbon on that. So, I mentioned our run rate – we watch our run rate and how we’re doing digitally with our catalogs. We are funded first and foremost, the catalog business for life sciences across the board, biopharma down through academia. And that’s remaining in teens tells us that things are okay. Then you look for other holes and we bridge it for you. This OEM thing is going to come and go, you pull that back, we’re back to normality. And on top of that, you have these growth programs. Our three top growth areas all hedged spectacular quarters. Spatial had double-digit, 45% GMP protein, 20%-plus in cell and gene therapy overall and Exosome at 87%. They’re not material enough right now to carry the average. But by next year, there are going to be a lot more material and they’re going to carry the average. So all the stuff fundamental coming back on top of these growth programs, we don’t give guidance, but we won’t be very happy here if we’re not a double-digit growth and so.”

This exchange highlights some of the richness of an earnings call. First, on this question both the CEO and CFO jump in to answer, one of the few times this happens in the Q&A, which may tell us something about the importance of the topic. Second, you can see the ‘hedging’ in language like, ‘we don’t give guidance, but we won’t be very happy here if we’re not a double-digit growth.’ And finally, you can see the narrative that BioTechne is advancing very clearly in this exchange: we have very strong growth areas and are optimistic that the headwinds bringing us down now are temporary and likely to improve in future quarters. Basically, they are trying to reassure investors about some less than spectacular numbers.

Finance for Scientists

A few more notes on how to listen to an earnings call

If you are following a company for multiple quarters, you can gain insight from listening closely for what the company disclosed relative to what prior research or earnings calls suggested they would disclose. Which topics did they emphasize, and which did they de-emphasize?

You might hear the word “guidance” on an earnings call, which is a term used to describe how the company orients analysts and investors around their projected future performance. Guidances are often given in ranges and with the caveat that they are directional only, so take them with a grain of salt. In the case of BioTechne, the CEO explicitly states ‘we don’t give guidance, but…’ When guidance is given, it’s generally a good idea to give it a close listen because sometimes the changes made to the guidance do provide important insight into the company’s future.

As stated above, some investors pay close attention to the tone used when delivering information. Is the information being delivered with energy and optimism? Or do the presenters seem sheepish and concerned? Of course, these assessments are highly subjective and can lead to false signal (and are much harder to get at from reading a transcript), but some investors will factor them into their overall read of an earnings call.

I strongly urge you to dig through past transcripts to get a sense of how both management and investors are thinking about the performance of the business.

Just for fun, here’s an article on GenAI prompts for analyzing earnings calls: https://www.mlq.ai/prompts/earnings-calls/

Next time we’ll talk about the ‘Big Five’ numbers that investors care about, including revisiting EPS. In the meantime, you can join the mailing list to be notified of when that comes out!

Leadership in Biotech