Forum Topics Valuation - Racing car analagy
Rick
3 years ago

If we were to think about a business as a racing car, we could make these parallels,

  1. The POWER of the engine would be the RETURN ON EQUITY (ROE)
  2. The ACCELERATION would be the FUTURE GROWTH in earnings
  3. The vehicle WEIGHT would be the DEBT, and
  4. The DRIVER would ne the MANAGEMENT.

Now, if we were to think about how we would choose a winning racing car...what would we be looking for?  We're obviously looking for the highest powered, best acceleration, lightest weight car with a trusted, highly skilled and experienced driver behind the wheel.

What is most important for overall performance?

  1. POWER - Most Critical! This is the key to acceleration!
  2. ACCELERATION - The acceleration determines the speed that will be achieved at the end of the race
  3. WEIGHT - The lightest is best because it takes more power to accelerate a heavy vehicle!
  4. DRIVER - The drivers skills and experience will be critical. The difference with a business is the management can also tweak the performance of the engine on the go.

Back to businesses - we are looking for a business with HIGH ROE that drives HIGH GROWTH that carries LOW DEBT and has trusted, skilled and experienced MANAGEMENT that doesn't make mistakes.

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Rick
3 years ago

Thanks for the excellent additions @Elpaso96. Before joining Strawman I would rarely consider a loss making business. Mainly because I didn't understand how to value them. However, I've learnt a lot from this community and the SM index clearly shows the best businesses can be found before they start making a profit if you know what you are looking for. I'm on a steep learning curve with buying into businesses pre-profit so thanks for pointing out the High Revenue Growth and Fat (>20%) Margins. 

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