Something to take note

One key point to take note when analysing a company annual report.

Do take note of companies that have large upfront cost (Such as marketing and advertisement costs) to acquire a customer and it’s expensed through the income statement, but then once you have that customer, it becomes a recurring stream of revenue.

It’s the idea of where the accounting doesn’t capture the value being created from locking in a long-term stream of service or parts business.

The concept is that the first several years are not going to look good on an income statement basis, but I’m locking in great cash flows for the next two decades. Great model, but the market hates it right now because the accounting earnings are bad, particularly if you’re in a ramp up or growth stage. However if you’re looking past that to the value creation, there can be huge opportunity.

there’s understanding the economics that are underneath it. You might have five years of high expense of acquiring those customers, and then you might have chunky amortization charges going to the income statement on the development costs and the customer acquisition costs for the next five years. At the same time, you’ve been locking in high NPV [net present value] customer contracts, but they’re not going to flow through the income statement