IROs invariably have a strong relationship and a direct line to colleagues in external reporting and financial planning and analysis. These teams are key counterparts of any strong IR team – providing insight and guidance into financial performance and prospects. If ever there was a time to appreciate one’s colleagues in financial policy and external reporting, it has been in the last few months, with the implementation of NI 52-112 Non-GAAP and Other Financial Measures Disclosure.

As our teams have discussed the implementation of the instrument, we have debated how best to handle the necessary identification, prominence and reconciliations of non-GAAP measures. At the core of many of our discussions has been the question of what metrics and measures really warrant inclusion in our disclosures, i.e. which ones are most useful to investors and analysts.

The data that investors and analysts focus on typically comes down to three key areas – financial trend analysis, relative valuation ratios and ratios to assess management’s effectiveness in generating returns.

For financial trend analysis, there are generally a few things that are helpful to investors and analysts.

• One is providing real insight into the choice of key metrics – why it is important for your company, especially if you are deviating from GAAP metrics and metrics typically used by data providers or peers. If you are going to make investors and analysts work harder to look at a non-GAAP operating margin or a cashflow metric as your key profitability metric, or as a base for a key ratio, they will want to understand why you are making them do extra work. And they will want to know this before they start focusing their reports around your choice of key metric. Disclosure can help here.
• The second is providing disclosure around the way the metric is calculated or composed, so investors can have confidence that the metric is consistent year to year or can understand how the composition may differ from peers, something that NI 52-112 is helping to address.
• Finally, trend analysis typically relies on having a longer time series. As an IRO, I want to make an investor’s or analyst’s life easier by providing everything in one easy to access place. Where we have had longer debates with external reporting colleagues is around providing investors with easy access to all the historic non-GAAP data in one place – as looking back to periods outside the current period disclosure means the addition of more GAAP to non-GAAP reconciliations.

Relative valuation really goes to the core of investing and, as all IROs will know, there are typically many views regarding how to value a company. Retail investors will often rely on data straight from the financial statements to calculate valuation ratios and the increased automation of data means that they don’t even need to calculate ratios themselves – they can be pretty confident in the information accessible via data providers. In fact, a number of U.S.-based issuers seem to share this confidence. I have come across several that provide a one-page overview of financial measures and key ratios through an easy website plug-in module [from Refinitiv] on their websites. These cover measures of profitability and most GAAP ratios you want – including valuation ratios and management effectiveness ratios. For an example of what some issuers are doing in this regard, click here.

But usually, there will be one or two ratios that really matter to your core analysts – and these will often be based on non-GAAP. Here again, though, there can be variation by analyst, by sector and by company – which a quick scan of sector analyst notes will reveal. In the case of our sell-side analysts, P/E and EV/EBITDA are most commonly used – but in other sectors, it may be P/Sales, PEG, or P/FCF.

Like most issuers, we don’t comment directly on these or provide these ratios in our disclosure documents. However, understanding which ratios are being used has meant that we have always placed more importance on ensuring that our EBITDA metric (reported and adjusted) is included and prominent in our disclosure. We are now disclosing a non-GAAP reconciliation to make it even more transparent to analysts and investors and even easier to ensure they are comparing similar measures when they do relative valuation.

Finally, return metrics are important in underscoring the returns management is able to deliver. Making a return metric a key performance indicator and disclosing performance against it can help issuers engage in a real dialogue with the Street around longer-term returns. While analysts may not focus on this in their notes, it will often come up in discussions with investors. The challenge here is finding the right metric, which addresses investor needs as well as the requirements of NI 52-112. Many companies choosing to focus on return metrics have historically not used GAAP metrics like ROA or ROE (in our case, it has been the Return on Invested Capital for our retail business). Although GAAP ratios straight from the income statement and balance sheet are straightforward to calculate and may be used for broad comparisons across sectors and companies, they often don’t capture the nuances of more complex businesses. This is an area where we are watching carefully what others do and how investors react.

In a world of increased data availability and increased regulatory guidance, IROs need to work to:

• Stay on top of evolving regulatory guidance, working alongside financial reporting teams;
• Understand what your investors and analysts really want and how they benchmark you against peers; and
• Focus energy on the metrics and disclosure that matters most.

Doing so should ultimately generate the most productive use of internal resources and the best possible dialogue with the market.

Karen Keyes is Head of Investor Relations at Canadian Tire Corporation Limited.