Economies of scale and operating leverage are characteristics that can provide significant barriers to entry and lead to impressive financial performance.
Showing posts with label operating leverage. Show all posts
Showing posts with label operating leverage. Show all posts
Thursday, 31 December 2015
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.
Read more: http://www.investopedia.com/video/definitions#ixzz1yiD0k3ZQ
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)
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