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According to a PwC analysis, "How non-GAAP measures can impact your IPO," NGMs can help private and newly public companies convey management's views on the entity's financial performance and supplement U.S. GAAP data required by regulators and other stakeholders.
But careful selection and identification of NGMs should begin at the earliest stage of the IPO planning process to avoid potential regulatory delays and negative reactions from investors.
An NGM will be reviewed carefully by regulators, for example, and investors will expect consistent use of NGMs after the IPO. These considerations should be factored into a company's IPO readiness assessment and project management.
Common Metrics
According to the PWC review of more than 400 IPOs completed between 2011 and 2013, nearly 60 percent of the offerings included at least one NGM.
The most common NGM during those offerings was earnings before interest, income taxes, depreciation and amortization (EBITDA), which was cited by nearly two-thirds of the companies going public. Adjusted EBITDA was another common non-GAAP measure, along with adjusted net income, free cash flow, adjusted gross profit, adjusted net earnings from operations, adjusted funds from operations, and "other."
PWC reported many companies also cite NGMs tailored to meet industry practices and business models, with organizations in sectors such as asset management, entertainment, technology, real estate and others defining their own NGMs or customizing metrics defined by other organizations.
NGM Objectives
NGMs are typically used by companies to provide additional context into metrics such as liquidity, cash flow and operating performance.
EBITDA, for instance, is often cited to provide an indication about a company's profitability, with adjusted EBITDA being used to assess liquidity.
Companies may adjust their NGMs further to address special items such as restructuring or impairment charges, and to eliminate the effects of non-cash transactions such as equity-based compensation.
NGMs will often evolve over a company's lifecycle, according to PwC:
"Young and growing companies that are attractive IPO candidates are often unprofitable at the capital raising stage so EBITDA may be considered more meaningful than price-earnings (P/E) multiples. After completion of an IPO, and as the company matures, there tends to be increased investor pressure to produce earnings and manage growth. It is post-IPO that companies often shift to a P/E multiple and an earnings per share (EPS) measure of valuation."
Stakeholder Considerations
NGMs are typically used by many stakeholders to communicate and assess the company's performance and financial health. Management will often cite NGMs while communicating with shareholders and the investment community. Similarly, institutional investors may use NGMs to assess investment alternatives, and equity analysts, investment banks and ratings agencies will evaluate NGMs in the course of their daily operations.
NGMs also carry important regulatory considerations. The SEC has released three basic presentation and disclosure models related to the use of non-GAAP measures. These models are designed to reduce the risk of potentially misleading information being disclosed to investors, and often require robust disclosures describing how NGMs were calculated and why management believes an NGM is useful to investors.
The regulatory and investor scrutiny that an NGM will undergo increases the importance of accurate definition and disclosure at the earliest stages of an IPO planning process.