Hi fifthperson team, under asset light business model, it was shared that "... perfect business model is ability to scale without need for excessive capital...". While one can look for asset light business model using FA and FCFE, what are the indicators to tell if a company has ability to scale without need for excessive capital? would it be increasing revenue/NP with corresponding high FCFE/same level of shareholder equity and debt? thank you n kind regards, wendy
Hi Wendy, Looking at the ratios, FA/TA and FCFE are enough to tell you that the company is asset-light. The ability to scale is to look at the company's business model. For example, I always like to ask how many customers can the business serve in an hour. Between these two businesses, which business do you think is more scalable?
- Medical doctor business: in an hour probably can serve between 3-5 patients
- A store selling coffee: in an hour probably can serve 10-20 customers
Hi Wendy, You are right. The coffee business is more scalable than the medical doctor business. After you know that the business is scalable, next is to understand the total addressable market (runway). For example, now replace the coffee business with Starbucks (assuming when they are in the early stage). Starbucks is a scalable business with the runway to keep opening more stores. The U.S. is a big country with 300 million population. That is the company's potential runway, but if they will expand out of the U.S., the potential increase. On the other hand, it does not mean that the medical doctor business is bad, as it is not much scalable. If the company scalability is low, I want to demand a high margin, which in this case, the medical doctor does have a high-margin business. I hope this answers your question.
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