Economies of scale: refers to a company's ability to leverage its fixed cost infrastructure across more and more clients.
Operating leverage: The result of economies of scale should be operating leverage, whereby profits are able to grow faster than sales.
Low ongoing capital investment to maintain their systems:
The combination of operating leverage and low ongoing capital requirements suggests that the firms should have plenty of free cash to throw around.
Telltale signs of good cash generation are dividends, share buybacks, and an accumulation of cash on the balance sheet.
E.g. Technology-based businesses: A desirable characteristic of technology-based businesses is the low ongoing capital investment to maintain their systems. For firms already in the industry, the huge upfront technology investments have already taken place. And the cost of technology tends to drop over time, so upkeep expenditures are minimal. The combination of operating leverage and low ongoing capital requirements suggests that the technology-based firms should have plenty of free cash to throw around.
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Operating leverage: The result of economies of scale should be operating leverage, whereby profits are able to grow faster than sales.
Low ongoing capital investment to maintain their systems:
The combination of operating leverage and low ongoing capital requirements suggests that the firms should have plenty of free cash to throw around.
Telltale signs of good cash generation are dividends, share buybacks, and an accumulation of cash on the balance sheet.
E.g. Technology-based businesses: A desirable characteristic of technology-based businesses is the low ongoing capital investment to maintain their systems. For firms already in the industry, the huge upfront technology investments have already taken place. And the cost of technology tends to drop over time, so upkeep expenditures are minimal. The combination of operating leverage and low ongoing capital requirements suggests that the technology-based firms should have plenty of free cash to throw around.
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