We've had @AswathDamodaran in the news a lot lately for his valuation of Zomato.
He correctly valued Zomato at Rs 41 when it was trading at Rs 126.
This is because of the quality of frameworks he has built to analyse and value companies.
Let's try and learn one of them today -
He correctly valued Zomato at Rs 41 when it was trading at Rs 126.
This is because of the quality of frameworks he has built to analyse and value companies.
Let's try and learn one of them today -
This framework is called "The corporate lifecycle", and it divides all companies into six stages -
1. Startup
2. Young growth
3. High growth
4. Mature growth
5. Mature stable
6. In decline
Fully understanding the depth of this framework can be a game-changer for your investing
1. Startup
2. Young growth
3. High growth
4. Mature growth
5. Mature stable
6. In decline
Fully understanding the depth of this framework can be a game-changer for your investing
Each stage has different characteristics that help companies succeed at that stage.
Let's understand them one by one.
Let's understand them one by one.
1. Startup
The company's goal here is to tell a compelling story, and therefore the management needs to be visionary.
The investor's job here is to understand if the company has potential or not.
The company's goal here is to tell a compelling story, and therefore the management needs to be visionary.
The investor's job here is to understand if the company has potential or not.
The company's resources are spent on product development while the funding comes mainly from equity. Debt at this stage can be a red flag.
Cash burn at this stage can be quite high, and reinvestment from revenues is also quite high while cash flows are usually negative.
Cash burn at this stage can be quite high, and reinvestment from revenues is also quite high while cash flows are usually negative.
2. Young Growth
The goal here is to be consistent with their story and therefore at this stage the management needs to be practical.
The investor's job here is to analyse the company's business model and to see if it makes sense or not.
The goal here is to be consistent with their story and therefore at this stage the management needs to be practical.
The investor's job here is to analyse the company's business model and to see if it makes sense or not.
The company's resources are spent on market testing and build-up. Funding still comes from equity, but some companies choose to go public at this stage.
Cash burn can continue to be high at this stage, reinvestment remains high, cash flows and operating profits are negative.
Cash burn can continue to be high at this stage, reinvestment remains high, cash flows and operating profits are negative.
3. High Growth
This is the stage where the numbers really need to come through, and the management must demonstrate their capacity to build.
The investor's job here is to see if the company's current business model can generate profits or not.
This is the stage where the numbers really need to come through, and the management must demonstrate their capacity to build.
The investor's job here is to see if the company's current business model can generate profits or not.
The company resources should be spent on scaling up production at this point.
Funding can come from equity or debt at this stage. However, the impact of the debt on profitability must also be looked at.
Funding can come from equity or debt at this stage. However, the impact of the debt on profitability must also be looked at.
With reinvestment remaining high, cash flows and operating profits should turn positive at this stage.
4. Mature Growth
Here the narrative and the leadership numbers must go hand in hand while looking for new opportunities to grow the business.
The investor's job here is to estimate the business's potential scale and see if the business is on the right track to reach that scale.
Here the narrative and the leadership numbers must go hand in hand while looking for new opportunities to grow the business.
The investor's job here is to estimate the business's potential scale and see if the business is on the right track to reach that scale.
At this point, the company's resources should be spent on augmenting capacity while looking for new opportunities.
Funding through debt may be higher relative to equity here. Operating profits grow quickly while reinvestment slows down. Cash flows are also positive and growing.
Funding through debt may be higher relative to equity here. Operating profits grow quickly while reinvestment slows down. Cash flows are also positive and growing.
5. Mature Stable
The narrative at this stage must honestly reflect the company's position, and the role of the management is to defend the company's position in the market.
The investor's job here is to estimate whether or not the company's competitive position is defensible.
The narrative at this stage must honestly reflect the company's position, and the role of the management is to defend the company's position in the market.
The investor's job here is to estimate whether or not the company's competitive position is defensible.
The company's resources should now be focused on capacity utilisation and augmentation only if needed.
Funding must be largely only through debt or cash flows. as opposed to equity.
Reinvestment further slows down while operating cash flows and profits stabilise.
Funding must be largely only through debt or cash flows. as opposed to equity.
Reinvestment further slows down while operating cash flows and profits stabilise.
6. In decline
At this stage, the company needs to focus on the parts of the company that are most competitive and let go of the parts that are not.
The management's role here is to identify which parts need liquidating to return that money to the shareholders.
At this stage, the company needs to focus on the parts of the company that are most competitive and let go of the parts that are not.
The management's role here is to identify which parts need liquidating to return that money to the shareholders.
Investors in declining companies need to understand if they will be able to receive more value than what they are paying for the business.
The company's resources are spent on focusing capacity where it is most productive and on returning cash to shareholders.
The company's resources are spent on focusing capacity where it is most productive and on returning cash to shareholders.
There should be no funding at this stage while debt must be brought down.
Divestment is the focus at this stage as opposed to reinvestment. Operating profits and cash flows decline.
Divestment is the focus at this stage as opposed to reinvestment. Operating profits and cash flows decline.
It is essential to understand where in the corporate life cycle are the companies you choose to invest in.
This will help you understand what to look for in your companies, and it gives you a framework from which you can understand management commentary.
This will help you understand what to look for in your companies, and it gives you a framework from which you can understand management commentary.
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