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When evaluating M&A targets, use multiple metrics, not just your favorites

Alok Bothra

An expert on valuation, capital market diagnostics, performance benchmarking, M&A, and investor relations, primarily in banking and insurance

Emily Clark

Collaborates with healthcare organizations on strategy, M&A, and partnership topics to improve the experience, quality, and affordability of healthcare for individuals and communities

Camila Guerrero

An analyst focusing on M&A strategy and due diligence in deals involving social, healthcare, and public-sector entities

Liz Wol

Coleads McKinsey's research and client service teams for healthcare M&A, strategy, and corporate finance globally

When executives are evaluating a potential acquisition target, they know they should use a range of metrics: net present value, ROIC, ROE, and so on. Often, however, they lean on the one or two metrics they know rather than the metrics that may better reflect a target company’s context.

Using ROIC or ROE as primary indicators of performance, for instance, may make sense when assessing a mature target but not so much when evaluating a high-growth, early-stage company. The latter is likely focused on revenue growth instead of near-term profitability, and it can, in some cases, take multiple years for it to deliver a profit. ROIC or ROE may be low or negative in the short term—but do those numbers tell the whole story about that target?

Instead, executives should adjust their evaluation criteria based on the profile of the target and the strategic intent for the acquisition.1 When looking at early-stage companies, for instance, they can index on ROIC and ROE, but they may also want to look at revenue growth (an indicator of how quickly the company can scale) and gross margin (an indicator of the company’s ability to cover the cost of goods or services sold).

Before evaluating any potential target, executives should determine the sort of value that they’re looking to create and the time frames that they’re targeting. Then they can use those measures that will truly differentiate great assets from less-attractive ones.

1. For more, see Sophie Clarke, Robert Uhlaner, and Liz Wol, “A blueprint for M&A success,” McKinsey, April 16, 2020.

Alok Bothra is a senior expert in McKinsey’s New York office, where Camila Guerrero is a consultant and Liz Wol is a partner, and Emily Clark is an associate partner in the Stamford, Massachusetts, office.

For a full discussion of market dynamics, see Valuation: Measuring and Managing the Value of Companies, seventh edition (John Wiley & Sons, 2020), by Marc Goedhart, Tim Koller, and David Wessels.