How to Analyse IT, E-Commerce and Digital Business Results

Hello, I am Umesh Tripathi, and we are learning the concepts of Fundamental Analysis. 
In this video, we are going to learn how we analyze the results of IT, e-commerce, digital businesses, and platform companies. 
What are the key ratios to check while analyzing these companies and what are the important financial statements and components to analyze. 

So, the traditional business models earlier were basically asset-heavy. 
But today’s modern business models have actually turned towards the digital-first approach, wherein most of the facilities to customers are being provided digitally. 
So basically, IT, e-commerce, and digital services are the kinds of companies which are dominating today’s economy. 
In such a scenario, analyzing these businesses requires understanding of the tech-driven performance metrics. 

Here, let’s understand what these businesses are. 
If we talk about IT companies, basically they offer tech services and consulting to other firms. 
Their core business is to provide tech services and consultation, like Infosys or Wipro. 
If we talk about e-commerce companies, they are basically selling goods or services online on digital platforms. 
You can take Flipkart or Nykaa as examples here. 
If we talk about digital businesses, these are purely internet-based services. 

Now, internet-based services means we are actually paying for certain services which are digital-based; we don’t have to go and procure or buy a certain product, but we are actually buying a certain service. 
For example, we are using Zerodha for investing this is a kind of digital service and platform services companies. 
Now, platform services companies basically match the users and providers on a digital platform. 
If we take Zomato as an example here: what Zomato does is it actually links the customers who are searching for certain dining preferences to certain restaurants, wherein this customer can actually use this platform to order food online. 

There are certain ratios in analyzing these kinds of companies which we need to take care of. 
Basically, there are a few growth ratios which we have to understand. 
Revenue growth is one ratio which is common across all these kinds of companies. 
GMV, which is Gross Merchandise Value, is an important ratio when you are analyzing an e-commerce company. 
Now, in the case of an e-commerce company, we have volumes of goods sold. 
Its information we actually get from the Gross Merchandise Value. 

Along with this, there are certain profitability ratios. 
Now, gross margin, EBITDA margin in the case of digital business spending efficiency is variant when we analyze these sorts of companies, and also LTV which is customer lifetime value, is an important ratio to take care of. 

Coming to the efficiency ratios, there are basically efficiency ratios like ROCE (Return on Capital Employed), ROE (Return on Equity). 
So most of these ratios we have already discussed in the previous videos. 
So here we are not repeating; their examples we have already discussed. 
Here, asset turnover is also an important ratio. 
So basically, asset turnover means how efficiently the company is using the capital and assets. 

And at the end of it, there are certain user-metrics ratios in certain kinds of companies, wherein how many Monthly Active Users and Daily Active Users are there on that platform we get that information from MAU and DAU. 
And from ARPU we get Average Revenue Per User, which helps us in assessing the monetization strength. 

Financial statements: when we are analyzing the income statement, the balance sheet, and the cash flow statements which are parts of the financial statements we have to look at certain revenue sources and certain expense sources when it comes to the income statement. 
Maybe service revenue in some kinds of companies, subscription in some kinds of companies, or income from ads and commissions in some kinds of digital platform companies. 
Talking about expenses, whatever tech costs there are for companies come under expenses. 
Marketing costs also come under expenses. 
And there are a few IT companies which actually show their expenses under R&D. 
So that comes under the income statement. 

Along with this, the balance sheet actually talks about the intangible assets like goodwill, software, platforms — these are kinds of assets which cannot be seen and cash reserves. 
In the cash flow statement, obviously we see information on operating cash flow, investing cash flow, and financing cash flow. 

Alright? So here let’s look at an example. 
Where we have a certain company  Nykaa  which is an e-commerce company. 
Now, for this e-commerce company, the GMV  that is, Gross Merchandise Value the figure you are seeing here is around 32,699. 
So, the data for Gross Merchandise Value fits for this particular company because it is an e-commerce company, and the total value of the merchandise it has is being shown in this particular data. 

Along with this, in the case of food-delivery companies like Zomato, we are seeing information on Gross Order Value — that is, GOV in their financial highlights, wherein you can see how the food-delivery GOV has increased year-on-year from FY 2022 to FY 2022 (as mentioned). 
The information about the trend they have shown in their annual reports. 

Along with this, if we analyze an IT company’s overall financial statements, then here, look at Birlasoft, as on 31st March 2024 — the consolidated balance sheet. 
Here there is information on their assets, in which there are current assets and non-current assets. 
There is information on their total liabilities, in which there is information on current liabilities and non-current liabilities, and there is information on equity as well. 
So basically, whenever we look at the balance sheet, there should be a balance between assets and liabilities plus equity. 
So here, the total assets data in millions is equivalent to total equity and liabilities, which is ₹39,256 million. 

Alright? Along with this, if we pay attention to their consolidated statement of profit and loss which is also the income statement — then here, it is an IT company. 
Birlasoft is an IT company, right? 
Now, it basically gets its revenue from operations. 
So, here there is information on revenue from operations under the income section. 
It has a few expenses employee benefit expense, finance cost, depreciation and amortization expense and removing those expenses from the income, we arrive at a profit before tax. 
Now, including the tax, we arrive at a profit for the year, which is around ₹6,237 million. 

Alright? Along with this, you have the information on the earnings per share here as well. 
Basic earnings per share here is around ₹22.54, and diluted earnings per share is ₹22.25. 

Also, if you see their consolidated statement of cash flows that is, if we look at their cash flow statement basically they have the information on their cash flow from operating activities. 
Here they have mentioned all the factors which account for cash flow from operating activities. 
So, the net cash generated from operating activities, which is under Section A, is ₹7,182 crore. 

Along with this, cash flow from investing activities: you can see they have purchased some property, plant and equipment, and some intangible assets — that data is mentioned. 
Along with this, they are receiving some interest from the bank deposits. 
So the net cash from investing activities here turns out to be a negative number, which is ₹6,269 million. 
And cash from financing activities, which is under Section C: you can see there are buybacks of equity shares, there is tax on buyback of equity shares, dividend paid — these items accounted lead to net cash in financing activities, which is again a negative number, which is ₹1,676 million. 

So basically, each digital or tech business has its own financial ratios that need to be looked into. 
Moreover, all of their profit-loss statements, their cash flow statements, and balance sheet statements look similar, but there are certain ratios which need to be looked into. 
Always remember: never forget to analyze the business model before analyzing the financials. 

So that’s all in this video. 
See you in the next video. 

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