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The Thoughtful Investor

Company And Financial Analysis

Understanding Business Models

This section begins with an understanding of business models, including concepts such as entry barriers, pricing power, brands, patents, and production costs. The discussion then moves on to market share and how it differs from mindshare, as well as the other critical factors that determine whether an investment is good or bad.


A good business is one that purchases on credit and sells on cash. Purchasing on credit indicates that there is plenty of competition amongst the suppliers while selling on cash means that the buyers are weak and dispersed. Both these attributes shift the bargaining power of the business to the company.


Additionally, if sales are happening for cash, it reflects that the product/service is in demand and the company does not have to keep a high inventory. This coupled with an excess of creditors over debtors because of the credit purchases and cash sales would keep the working capital in check while taking it negative at times.


Business Models:

  • Entry Barriers
  • Brands
  • Market share vs. Mindshare - Mindshare refers to the customer coming to purchase the product.
  • Franchise-led growth necessitates less capital investment.
  • Changing the metric of measurement - Buying commodity and selling brands
  • High gross margins
  • Government Lease
  • Patents
  • Low cost of production and economies of scale
  • Large Upfront Capital Expenditure
  • Network Effect and Switching costs
  • Product Penetration and Distribution Network
  • Low Priced Items
  • Postponement Possibility - Products that cannot be delayed, such as toothbrushes and medicines.

Tools of Financial Statement Analysis & Growth, RoE with DuPont Analysis

These tools discussed in this chapter work together to assist an investor in conducting a thorough financial analysis of a stock. The chapter begins with the argument that no single analytical tool is sufficient and that an investor must rely on a combination of these. The DuPont method of analyzing the RoE is followed by case studies from the past, reasons for how and why the RoE matters, and how it equates with growth and dividends.

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