Friday, June 11, 2021

No Fluff 1 - Revenue

So, I like looking at companies which are growing - they aren't necessarily newly listed but they have to be in business for a while now. By growing, I mean it from a revenue standpoint. Naturally, growth companies make up the bunch of companies I'd like to pay attention to.

What is success for a business? I like to think, however you define it, it will be tied to the amount of revenue it makes and the % changes in that amount year to year. If people like what the business offers, they are going to have to pay for it, which means revenue for the company. Then, if the business continues to offer what customers want, they'll get paid more for it - how well can the business serve customer needs, and how much more value will it be able to command, which will translate into more revenue for coming years - if this goes on, the business' revenue will continue to grow with every year. Example? Netflix and its algorithm to give you what you'd likely want to watch. NVidia and their GPUs, giving gamers countless hours of hand-eye coordination exercises and honing problem solving skills. SEA limited with Shoppee, giving us what we want when they can send it. 

So, Revenue is an aspect I'd take a look first in the business. Specifically, I would want to know the amount of revenue it makes in a year, look out for its total addressable market - to get to know the industry revenue and how much of the business' revenue as a % of the total addressable market, the trend in the last few years - what % has it been growing at in the last few years. 

Revenue then translates into net income and cashflow - it need not have a high or even positive net income in the early years, but cashflow is important given the costs these businesses usually incur in sales and marketing, as well as ESOPs. A Cashflow positive business is always good - that can be put into R&D, expand into other geographies, and fund expansion plans. Of course, one could always raise more cash by going to shareholders or taking out a loan, but that's always not as nice as being able to generate free cashflow yourself.

Total addressable market tells us how big of the pie in which the business operates in, is your business growing as fast as your competitors, and how much business the business will be able to make business out of.

The trend in the last few years can tell us the story behind a business. Is it increasing every year and is it increasing more every year? When the revenue dips, is there a reason which is out of the control of the business? High revenue growth %, coupled with increasing PE or PS values, results in high share price. 

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