Fantastic analysis Sir. And your last paragraph answered an important question in my mind – what if such an asset turns out to be an expense instead of an investment? Case in point – many e-commerce companies. They spend to build robust infrastructure (accompanied by acquisitions of other platforms). Although reported earnings take a hit, the intent is to grow GMV in future. So maybe important question is: Will this strategy really create added value in future? So maybe we can come back to assess the strength and durability of the business model. So merely increasing GMV (increasing mind share of shoppers) does not add value unless the company has a robust model in place. Otherwise in a fiercely competitive e-com environment, merely spending money to gain GMV may not add anything in the coffers of the company in future as well. Isn’t it?
Yes of course. There has to be a PAST track record of very intelligent outlays of cash which were treated as expenses but turned out to be assets. And even current outlays for expanding the market which the analyst chooses to treat as assets are subject to impairment tests.
Makes sense. Thanks much….
Sir, thanks a lot for sharing your knowledge and the wisdom. Sir,Please correct me if I am wrong. Instead of looking at P&L account, is it right approach to look more at cash flow statement for analysis because eventually any adjustments has to be reflected in the growth of cash flow…
Wow. A Brilliant post. I find your ability to edit stuff amazing.
The ability to suffer short term (accounting or cash wise) and retain focus on the core business or brand is available only to a select few businesses and then too, only when managed by competent managers.
I guess this is one of the most difficult parts of staying put with a investee and believing that this particular company is willing to suffer now to reap the fruits later.
Amazon, Liberty Media come to mind.
As always, thanks for writing.
Thank you for your sharing…
Thank you so much for this insightful post and for the teachings you provide us every day through your twitter course. Can you please provide more color/detail on a broad level on which are the “certain conditions” that apply and those that don’t when being tempted to capitalize certain expenses? General categories would help us avoid folly: as Charlie Munger once quoted “I’d like to know where I am going to die so I will never go there”. Thanks!
Thank you sir for such beautiful insights..
However in the same context I observed that same thing is happening in payments space many companies “wallet providers”, “payment gateways”, “banks” all are burning cash to get and retain customers. but I have some doubts about this strategy, like
1) what kind of revenue streams they are looking for apart from minuscule transaction fees, 2) in current environment how they will ensure customer stickiness since every body is giving discounts,
3) what I can ascertain that these companies wants to be part of customers transaction journey and would monetize that through big data analytics’s, which is currently available only with the banks and card network providers,
4) Since existing banks and card providers has their future on stake how and till when these new companies would be able to compete with them.
It would be great if you could provide some light on that.
Thank you sir
Mr.Sanjay Bakshi for this great article,but I wanted to ask you question about Amazon,I don’t understand how Amazon makes profit.They have positive free cash flow but they are not profitable.Could you please explain.
Thank you sir.
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