Thinking of buying an IT stock?
How to read an IT services stock
Their product is people's time, sold mostly to clients abroad.
How they make money
Big companies abroad hire them to build and run their software.
They bill for engineers' time or for finished projects, mostly in dollars.
Profit is the gap between what clients pay and what the engineers cost.
Numbers to check
Tap any number for a full lesson with pictures.
- Sales (Revenue) GrowthClients' tech budgets drive everything. Growth shows whether they're spending more.
- Operating Profit MarginSalaries are the biggest cost. Margin shows how well the company prices and staffs its work.
- Employee Attrition RateWhen engineers leave, hiring and pay costs rise and projects slip.
- Return on EquityNeeds little machinery, so a well-run IT firm earns a high return on its money.
- Price-to-Earnings RatioIT shares often trade at high P/Es. Compare with the company's own past and its rivals.
- Dividend YieldMature IT firms return a lot of cash through dividends and buybacks.
Practice: Orbit Infotech's numbers
Orbit Infotech is a made-up company that builds software for foreign clients. Here's how its key numbers read against the rough guides.
| Number | Orbit Infotech | Rough guide says |
|---|---|---|
| Sales growth | 10% | Steady |
| Operating margin | 20% | Decent |
| Attrition | 15% | Normal |
| ROE | 22% | Good |
| P/E | 25x | Middle |
| Dividend yield | 2% | Moderate |
For a real company, check each number over at least five years and against its closest rivals. One year alone can mislead.
Also look at
- Deal wins: new contracts signed, the clearest hint of next year's sales.
- Constant-currency growth: growth with rupee-dollar swings taken out.
- Client concentration: how much comes from the top few clients.
Red flags
- Margins falling while attrition rises.
- The company cutting its own growth forecast (guidance).
- Heavy dependence on one client, industry or country.
Numbers that mislead here
- Price-to-Book RatioTheir value is people and client relationships, which aren't on the balance sheet.
- Interest Coverage RatioMost have little or no debt, so there's almost no interest to cover.
Other sectors
Banks
Their raw material is money, so they need their own set of numbers.
NIM · Gross NPA · CASA · Capital adequacy
Pharma
Medicines for India and the world, with regulators watching every factory.
Sales growth · Operating margin · R&D spend · ROCE
FMCG
Everyday products like tea, soap and biscuits, sold in every town.
Sales growth · Operating margin · ROCE · ROE
For learning only. Example companies are made up, and the rough guides are rules of thumb, not targets. Nothing here is advice to buy or sell any stock.