Investing What assets do companies in this With manufacturing companies, for growth business have to invest in, to grow? investments is generally in How much investment are companies plant, equipment and assembly making collectively in this business lines, but with technology and to generate their growth? How easy pharmaceutical companies, the is it to scale up? investment may take the form of R&D. Risk How much do revenues and earnings Volatility in your vary across time? revenues/earnings can be What are the forces that cause these caused by macroeconomic operating numbers to change? variables, which can include How much debt (or fixed interest rate, inflation, commitments) do companies in this commodity price and political business tend to carry? risk or from company-specific What are the risks that companies in variables. this business may fail? What is the trigger (debt payments due, running out of cash) that cause failure? With established companies in mature businesses, this analysis is relatively simple to do, since the market characteristics are observable (market growth, profitability, trend lines) and often forecastable. Your job gets more difficult if you have companies in evolving or changing businesses, with that change coming from a maturing of the business, a shift in consumer behavior (as is the case with the entertainment content business as consumers shift to streaming), changes in regulatory rules/restrictions (for example, the telecommunication business after deregulation) or geographical shifts. In these cases, you will not only have to make a judgment about the current state of the business but also how you see it evolving over time.
Investing for growth What assets do companies in this business have to invest in, to grow? How much investment are companies making collectively in this business to generate their growth? How easy is it to scale up? With manufacturing companies, investments is generally in plant, equipment and assembly lines, but with technology and pharmaceutical companies, the investment may take the form of R&D. Risk How much do revenues and earnings vary across time? What are the forces that cause these operating numbers to change? How much debt (or fixed commitments) do companies in this business tend to carry? What are the risks that companies in this business may fail? What is the trigger (debt payments due, running out of cash) that cause failure? Volatility in your revenues/earnings can be caused by macroeconomic variables, which can include interest rate, inflation, commodity price and political risk or from company-specific variables. With established companies in mature businesses, this analysis is relatively simple to do, since the market characteristics are observable (market growth, profitability, trend lines) and often forecastable. Your job gets more difficult if you have companies in evolving or changing businesses, with that change coming from a maturing of the business, a shift in consumer behavior (as is the case with the entertainment content business as consumers shift to streaming), changes in regulatory rules/restrictions (for example, the telecommunication business after deregulation) or geographical shifts. In these cases, you will not only have to make a judgment about the current state of the business but also how you see it evolving over time.
NarrativeMay2016.docx