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How to determine whether the business is asset light or heavy?

Questions › Category: Business Quadrant › How to determine whether the business is asset light or heavy?
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Ang Henry asked 4 years ago

Hi need your thoughts on the above thanks.

4 Answers
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Victor Chng answered 4 years ago

Hi Henry,
 
You can track them by their FCF to equity. Usually asset light company have high FCF to equity. 
 
Another way is to look at whether the company need to constantly buying more asset to increase their revenue. If the company can use existing asset and scale then very high chance they are asset light.

Ang Henry replied 4 years ago

What’s the minimum FCF to equity ratio then?

Victor Chng replied 4 years ago

you can look at 10%

Ang Henry replied 4 years ago

Noted on that, thank you!

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Ang Henry answered 4 years ago

Hi Victor,
How about analyzing the balance sheet whether the current assets are much higher than current assets?

Victor Chng replied 4 years ago

You can do that too by using their Fixed asset to Total Asset. Fixed asset are PPE and Inventories. I think those that are super heavy asset should have more than 50% in this ratio.

Ang Henry replied 4 years ago

In your opinion what percentage is considered asset lite?

Victor Chng replied 4 years ago

there is no fixed rule to this amount. It is case by case basis. Based on my experience, should be below 30%

Ang Henry replied 4 years ago

I will take it from there, thank you Victor!

Justin O replied 2 months ago

when it comes to PPE, do we take Gross or Net PPE in order to determine whether FA/TA ratio is high

Justin O replied 2 months ago

when it comes to PPE, do we take Gross or Net PPE in order to determine whether FA/TA ratio is high

Justin O replied 2 months ago

when it comes to PPE, do we take Gross or Net PPE in order to determine whether FA/TA ratio is high

Justin O replied 2 months ago

when it comes to PPE, do we take Gross or Net PPE in order to determine whether FA/TA ratio is high

Victor Chng replied 2 months ago

Hi Justin, You can take Net PPE

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Ang Henry answered 4 years ago

And what’s the guideline of high FCF to equity that makes them asset lite?

Victor Chng replied 4 years ago

Those asset heavy business usually generate less than 10% FCF to equity where those super asset light generate more than 20% FCF to equity

Ang Henry replied 4 years ago

In this case would you suggest to invest in asset heavy business or otherwise?

Victor Chng replied 4 years ago

Hi Henry,

Company that are heavy asset does not mean it is bad. There are many asset heavy company that good business too. The important thing is to make sure you pay them at the right price. Of course, if you have 2 option on the table with same valuation then you probably want to choose the asset light one.

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Ang Henry answered 4 years ago

Hi Victor,
Point taken, thank you for providing your insights!

Victor Chng replied 4 years ago

You are welcome :)