What is the payback ratio?

The flood of IPOs of new-age companies has sparked countless debates on valuations in recent years. And more often than not, these debates are centred around P/E. Take the example of Nykaa. When the new age cosmetic seller debuted on D-street, many veterans pinched their noses when they saw a P/E of 1,600 times. And rightly so. But very few were curious if Nykaa would ever earn enough to match its market cap, i.e., will it earn enough profits in its lifespan to break even its market capitalisation? This is where the payback ratio comes in. It provides an estimate of how long a company will take to accumulate profits equal to its market capitalisation. Generally, it is calculated using the following equation: Payback ratio = Current m-cap / estimated cumulative profit of the next five years As futur

This article was originally published on March 21, 2023.