Methodology
Developed and applied by Dr Savvas Savouri and team since creation in 1995. Read more about our methodology
QuantMetriks has been developed as a software–based quantitative economic tool.
The system offers a graphical insight into the performance of a comprehensive set of industrial, retail, construction and distribution sectors. The system is global. It currently spans the UK, US, German and Japanese sectors.
The data is drawn from the databanks of the Office for National Statistics (UK), Eurostat (Continental Europe), the Bureau of Statistics (US) and other assorted official government statistical agencies. By virtue of their status as executive agencies, government statistical bodies have a statutory right to demand companies be part of their sample.
On being approached, firms have an obligation to complete a monthly return form. These require the companies to reveal how their prices and volumes have moved from month to month. Once compiled, the data gives an invaluable insight into trading performance at the product level, albeit still in its raw form. Due to software efficiencies within the QuantMetriks team, the raw information is disseminated swiftly, such that data for a particular month is available as soon as it is released.
QuantMetriks couples material, labour and service cost data with a measure designed to reflect dynamics in operational costs (reflecting overheads). It thus creates a unique unit cost indicator for each sector under investigation. Alongside the measure for the change in total unit costs, QuantMetriks constructs a measure capturing the growth in unit prices. For manufacturers and distributors, this reflects a weighted basket of prices charged to domestic and overseas customers. For retailers, it represents the high street price of goods sold.
By taking the differential between growth in prices and costs, the system is able to construct a year–on–year dynamic for trading margins. The QuantMetriks system also tracks revenues. Here it compares price inflation with dynamics in activity. For manufacturers and distributors, activity reflects actual production volumes. For retailers, activity represents retail sales volumes.
The system allows the measurement of business performance on a monthly basis. It thus provides an invaluable in–fill between the traditional six–monthly reporting periods in Europe, and quarterly reports in the US.
With corporate governance becoming ever stricter, access to a reliable but independent source of data will itself become all the more important – remembering of course that the data itself derives directly from companies.
The mechanics of the process can be summarised:
Assume a Leontief productivity process:
so
and
so
=
Where y denotes output level, represents level of factor intput 1, and
is a fixed parameter.
This produced a cost function =
Where denotes the unit cost of factor input 1 (which say reflects labour), and FC denotes the fixed cost component.
Profit margin
Where denotes product price.
Denoting the cost share of factor input 1 by , and factor input 2 by
, and where
is therefore the fixed cost share.
denotes the change in labour productivity. The formula extends conveniently 1 year in the same fashion for multiple factor inputs.
Put simply, the absolute percentage point change in margin is the net difference between price and cost inflation.
Revenue
In
To summarise, the percentage change in revenues is the sum of the percentage change in prices and the percentage change in volumes.
In this section we outline one method of conveniently ranking the sectors covered by the QuantMetriks data-base.
In general the interpretation of the template for each sector is left largely to the eye of the beholder. Whilst some might be inclined to screen for sectors enjoying accelerating growth others might be keener to identify sectors experiencing a turning point in their performance.
Notwithstanding individual preference in what follows we try to formalise matters by establishing a scoring system for the revenue and margin signals presented in charts 1 and 2 of each sector template.
It is important to make clear that the QuantMetriks system does not deal in a sectors absolute margin, its revenues, or indeed any other of its performance metrics. Specifically, charts 1 and 2 present the year-on-year change in each sectors revenue and operating margin, whilst Charts 3 and 4 highlight changes in pricing, demand and costs. Moreover, the year-over-year change in chart 2 reflects the percentage-point movement in the relevant sector’s operating margin. In short, direct comparisons across sectors are not possible purely from an inspection of their respective charts 1 and 2. However, within our framework we can create ordinal scores for the changes in revenues and margins. These can then be used for cross-sector comparisons. Let us elaborate.
Sectoral ABD Analysis: QuantMetriks System
In what follows we outline three scores which can be attached to each sectors year-over-year change in revenue and its year-over-year percentage point change in operating margin. By combining all three, or some permutation of these six measures, one can then rank sectors according to the strength or weakness of its relative trading position.
1. Alpha scores
Chart 1 reveals quite clearly whether a sector is enjoying a year-over-year increase or decrease in its top line. Similarly, chart 2 highlights if its operating margin is higher or lower than its level of twelve months earlier. With this evidence we can create an alpha score of +1 for absolute growth, and a score of -1 to reflect contraction in each sector's revenue. We can produce a comparable score for the sector's operating margin. |
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