Are you trying to forecast cash flows?
You need to know where the business is at in its lifecycle.
Hereโs how:
You need to know where the business is at in its lifecycle.
Hereโs how:
2/
Introductory Phase
- The product attempts to be accepted by the market.
- It has reasonable sales growth.
- Cash requirements are high.
- It has limited profitability.
It's almost impossible to value companies in this phase.
Introductory Phase
- The product attempts to be accepted by the market.
- It has reasonable sales growth.
- Cash requirements are high.
- It has limited profitability.
It's almost impossible to value companies in this phase.
3/
Growth Phase
- The product has gained acceptance into the market.
- Sales growth is high.
- Cash requirements are high.
- It has reasonable profitability.
Price to sales is often used to value companies in this phase.
Growth Phase
- The product has gained acceptance into the market.
- Sales growth is high.
- Cash requirements are high.
- It has reasonable profitability.
Price to sales is often used to value companies in this phase.
4/
Maturity Phase
- Weaker companies begin to fail.
- Growth rates begin to slow
- Cash generation is high
- Profits peak.
We can use earnings and cash flow multiples here to value companies.
Maturity Phase
- Weaker companies begin to fail.
- Growth rates begin to slow
- Cash generation is high
- Profits peak.
We can use earnings and cash flow multiples here to value companies.
5/
Saturation Phase
- Sales growth has stalled or is beginning to reverse.
- Overproduction may begin.
- Prices begin to tighten.
- Weaker companies fail.
- Oligpolois appear.
- Cash flows are still positive.
- Profitability has fallen from its peak.
Saturation Phase
- Sales growth has stalled or is beginning to reverse.
- Overproduction may begin.
- Prices begin to tighten.
- Weaker companies fail.
- Oligpolois appear.
- Cash flows are still positive.
- Profitability has fallen from its peak.
6/
Decline Phase
- Oversupply is an issue.
- Price wars begin due to oversupply.
- Sales are reducing.
- Earnings are declining.
While we can still value companies based on earnings and cash flow this is where you can fall into value traps.
Decline Phase
- Oversupply is an issue.
- Price wars begin due to oversupply.
- Sales are reducing.
- Earnings are declining.
While we can still value companies based on earnings and cash flow this is where you can fall into value traps.
7/
When trying to forecast cash flows it's important to determine where the company is in the lifecycle.
When trying to forecast cash flows it's important to determine where the company is in the lifecycle.
8/
During the first two phases we will see high revenue growth but low profits and cash flow.
During the first two phases we will see high revenue growth but low profits and cash flow.
9/
In the maturity phase cash flow and earnings growth will be at their greatest.
This will start to decline as the market is saturated.
In the maturity phase cash flow and earnings growth will be at their greatest.
This will start to decline as the market is saturated.
10/ Finally earnings and cash will begin to fall in the decline phase. You don't want to get caught out paying too much for a company coming into the decline phase.
11/
During the different phases, companies will be optimizing for different things.
Early on they want customer and revenue growth.
Later they want earnings and cash flow.
Knowing what they are optimizing for can help you value them.
During the different phases, companies will be optimizing for different things.
Early on they want customer and revenue growth.
Later they want earnings and cash flow.
Knowing what they are optimizing for can help you value them.
12/
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