Showing posts with label economies of scale. Show all posts
Showing posts with label economies of scale. Show all posts

Thursday 31 December 2015

Look for scale and operating leverage.

Economies of scale and operating leverage are characteristics that can provide significant barriers to entry and lead to impressive financial performance.

Tell tale signs of good cash generation: Dividends, Share Buybacks and Accumulation of Cash on the Balance Sheet

Economies of scale refers to a company's ability to leverage its fixed cost infrastructure across more and more clients.

The result of scale economies should be operating leverage, whereby profits are able to grow faster than sales.

The combination of operating leverage and low ongoing capital requirements suggest that the firms should have plenty of free cash to throw around.

Tell tale signs of good cash generation are dividends, share buybacks, and an accumulation of cash on the balance sheet.

Another characteristic to look for when evaluating investments is predictable sales and profits. That makes financial results more stable and predictable.

Should there be high barriers to entry into this business, the firms in this business tend to have wide, defensible moats.

When they are trading at cheap prices, they are usually worth a good look.

Sunday 24 June 2012

Telltale signs of good cash generation are dividends, share buybacks, and an accumulation of cash on the balance sheet.

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. 



  • Understanding Free Cash Flow (Video)

  • Read more: http://www.investopedia.com/video/definitions#ixzz1yiD0k3ZQ


    1. Understanding Free Cash Flow