SIMON BROWN: When a metric disappears

At its latest results announcement, Netflix said it would no longer publish subscriber numbers from next year. Its logic is that it’s not a great measure and it is focusing on different metrics. Fair enough, but no. Subscriber numbers are useful and many investors use those numbers for their models. Sure, there is a lot else that matters, but so do these numbers. 

Another example of a hugely popular metric disappearing is average revenue per user (arpu). Back in the early days of the mobile providers, it was all about arpu. Every set of results would mention this number and trumpet the increases. But then the increases stopped, so the telecom companies simply stopped mentioning them. You could reverse-engineer the data, and many did. But the stark reality is that it no longer told the story that telecom managements wanted to tell, so they just dropped it (check the share price graphs to see how that went).

But there are other metrics that are hugely useful and are still around. I always look at two from the banking sector when I’m checking results. The first is cost to income — the ratio between operating expenses and operating income. Typically, large banks have this ratio in the mid-50s (the ratio is expressed as a percentage), but it has been coming down; the Capitec results showed it dropped to an impressive 39%, something I did not expect to see. 

The second one is impairments. It used to just be called bad debts and it is the ratio of debt defaults to total debts issued. Here the local banks also provide a through-the-cycle range. It is lower during good times and higher when things get tough. Right now, impairments are at or close to the top-of-the-cycle range, and with rate cuts fading into the distance we can expect some bank impairments to breach the top of the range, hurting profits. 

Mining uses grade, or the grams of mineral per ton of rock mined, which gives an indication of how rich the seams they’re mining are. A decline can also suggest that it is getting harder, and that can hurt profits as fewer grams per ton mean the same costs but less of the mineral for sale. 

Mining also uses all-in sustaining costs, a metric that is used to define the current cost per gram or ton of mineral mined. Ideally, this reflects the cost excluding growth projects and the like, and is useful for comparison over time and between different mines. 

The local mining industry also has the very useful South African mineral reporting codes (Samcodes), of which the South African code for the reporting of exploration results, mineral resources & mineral reserves — better known as the Samrec code — is my favourite. The standards ensure everybody is on the same page and help us spot junk data when a miner uses jargon not clearly defined by the Samcodes. 

Know the important metrics and always ask why some disappear.