Areas where values can be hidden.

1. A gradual transformation of a B2B business with much lower profit margins into a B2C business with much higher margins if it becomes successful.

2. How operating cash flows in some businesses are far in excess of reported earnings thanks to over-conservative depreciation policy and how, over time, the reported earnings will catch up with operating cash flows simply because of passage of time.

3. How the true earning power of some growing businesses can become visible just by mentally stopping the growth capex. Charlie Munger once said: “You should seek businesses that just drown in money if they just pause for breath.” Well, then why not mentally make them pause some businesses to catch their breath and visualize the results?

4. How in a highly leveraged firm, debt reduction from sustainable operating cash flow will increase value over time. So might debt reduction from sale of some operating Visual Thinking 2 assets under some circumstances.

5. How a firm’s true earning power is camouflaged because the earnings of a great business are subsidising the losses of some miserable ones and there is a credible plan in place to stop the haemorrhage. Or maybe the camouflage is there because some businesses which have great potential are still in growth phase and have not yet started recovering their costs which were incurred for a certain scale yet to be achieved by them.

6. How an asset-heavy business that’s into manufacturing transforms itself into an asset light business by outsourcing production or generally speaking, how tradeoffs between margins and capital turns can change the value of a firm over time.

7. How the fundamentals of a business deteriorate over time thanks to increase in the intensity of competition in its industry (how the P&L will change, and how the balance sheet quality will change).

Taken from Sanjay Bakshi notes.