Creating segments and classifications about what really works in a sector can help you massively.

EG:- IT is just not about IT, there are Product companies, SAAS Businesses, services companies, ER&D companies and Corporate Learning Companies.

Praj is not just an Ethanol Play. Found this bit to be the best, creating mind map of optionalities requires in-depth understanding and use of knowledge from multiple domains. Hats off @unseenvalue 🙌🙌
https://t.co/XP4SErAZVo

@nivin27 Kenneth Andrade & all his interviews ever

Another Superb Blog by @badola_arjun . This time on Apollo Pipes 🏗️🏗️

This completes our PVC/CPVC pipes industry analysis. Done with Astral,Prince and Apollo 😀

Link to read🔗: https://t.co/Ib40q9Fg3g

Everything about Free cash Flow Simplified!

What we will talk about in this 🧵🧵:

1⃣What is Free Cash Flow
2⃣How to calculate Free Cash Flow
3⃣Types of Free Cash Flow
4⃣Importance & Limitations of Free Cash Flow

Let's dive in ⤵️⤵️

What is Free Cash Flow?

Free cash flow means the cash that is left over after a company pays for its operating expenses and capital expenditures (Capex) like purchasing new machinery, equipment, land & building, etc. and satisfying all its working capital needs.

In simple words, suppose whatever cash that is left with you after you spend your salary or income is known as Free cash flow that you can use for different purposes.

The more FCF a company has, the better it is. Businesses which generate high FCF can:-

1⃣Give investors higher dividends
2⃣Do share buybacks
3⃣Build a war chest for acquisitions or Capex.
4⃣Reinvest in the business when opportunity arises with lesser dependence on debt.

How to calculate Free Cash Flow👇:

To calculate free cash flow, all you need to do is open the Cash Flow Statement and subtract "Net Capital expenditure" from "net cash from operating activities".

Why Reading and observing different trends matter.

Time for a thread with a live example that is playing out in front of us! 🎵🎵

🧵🧵🧵🧵🧵

“What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ‘em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.”- Charlie Munger

Charlie Munger who is the partner of Warren Buffett, has over the years explained the importance of creating a latticework of mental models. That is basically combining theory with live practical examples

One of the most interesting mental models he talked about in his books was that of Autocatalysis (lets understand this and how we can apply it to a live example):

"Disney is an amazing example of autocatalysis. They had all those movies in the can.

They owned the copyright. And just as Coke could prosper while refrigeration came, When the video cassette was invented, Disney didn’t have to invent anything or do anything except take the thing out of the can and stick it on the cassette.

Once in a while one should study the company which lacked the execution, which always over-promised and under delivered. Check how market valued it over the period of time. As it gives us the framework to avoid potential capital allocation mistakes i future. 🧪⚗️

Paying 50-100x earnings for 'blue ocean' sectors has become normalized with promise of changing trends and immense future opportunity. Stock markets look forward, if the future opportunity is great, in most cases that 100x valuation already factors a 30x valuation in 3 years.

For investors, the question of where the buck stops is difficult to answer, because the goal post keeps changing. 30x is reasonable for one business, for another 70x is acceptable. So why not everything in between too?

Not every business captures the opportunity available. There is many a slip between the cup and the lip, as my English teacher used to say. When investors have seen valuations creep from 20x to 100x in a matter of a year or two, it is easy to to keep dancing to the same music.

But like we used to play musical chairs in childhood, someone will be left standing too. And here the rules aren't that 1 person gets eliminated at a time, hundreds get crushed at the same time. In childhood, we had a 1/X chance of being caught standing when the music stopped.

The margin of safety was high till you got down to the last 3-4 people playing the game. Similarly, your margin of safety reduces dramatically when valuation becomes irrelevant. A few months of underperformance and suddenly things don't look so rosy any more.

Rivian ($0 revenue, -$1.6 billion net income) now has a higher market cap than Starbucks ($29 billion revenue, $4.2 billion net income) and Target ($100 billion revenue, $6.3 billion net income).

$RIVN $SBUX $TGT

Data via @ycharts

EXCERCISE, showing how Discount Rates impact Valuation, using $NFLX as an example.

Why?

“Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices"

--- Warren Buffett

(1/4)

The Futures curve is pricing in 8 Interest rate increases, or +210bp that the ANALYTS at Investment Banks have NOT yet adjusted for in Models

Investment Banks typically use the 10yr Bond, + Equity risk Premium + Beta Adjustment to arrive at a Discount Rate😉

Cont ..

(2/4)

Scenario 1 - Use todays scenario Consensus (Factset) with a 7% Discount Rate, gets +10% upside in Share price for $NFLX to $416 (36.3x P/E)

Yet ...

(3/4)

Scenario 2 - Same Consensus forecast but add 210bp to the Discount Rate. Surprise Surprise😉 Now there is -31% to todays Share price, with a price of $263 (22.9x P/E)

What do you choose 🧐❓

This is why there is always a focus on the 10 Yr Bond, as Equities are priced to Bonds & the cashflow they can generate

Now you can see how sensitive valuations can be to changes in Interest Rates. The Bond Market is pricing in rises, YET Analysts at Investments Banks have not

Doesn't matter what's the market cap is - micro or large, the quality of any business is never unseen. You screen through the last 5-10 years of balance sheet and cash flows and you'd know what can and cannot compound wealth. Narrative alone is useless. Numbers have to match.