What’s an attractive business?

Who amongst these three is a more inspiring leader? - Abraham Lincoln (AL), Mahatma Gandhi (MG) or Alexander (A)

It’s difficult to say… Let’s briefly see what these leaders are remembered for..

AL: Humility, perseverance and practical leadership. Knew the importance of infrastructure to an economy. Fought against racial discrimination. Leadership during civil war. None of the things he did was rocket science. He did small things.. yet he did them consistently and achieved a number of small victories.....

MG: Truth, simplicity, non violence.. Fight against the British and the Indian independence... Father of an entire nation. A leader who did simple things.. Yet had the mettle to inspire millions to follow him.

A: One of the most successful military commanders of all times. Conquered the entire world. He did not do small things. He did great things that continues to inspire us even centuries after his time..

Ok.. What have these leaders got to do with my original question on what is an attractive business? Here you go...

If we agree that shareholder returns is a reasonable measure on evaluating business attractiveness, there are three important components which constitute shareholder returns:

1. Margins

2. Asset Turnover

3. Leverage

 

That’s because

(Net Profit/ Sales) i.e. Margins X (Sales/ Assets) i.e. Asset Turnover X (Assets/ Equity) i.e. Leverage  = (Net Profits/ Equity) i.e. Shareholders Returns

It’s great if a business scores well on all these three counts. But even if it scores extremely well on one of these counts, it can constitute an attractive business..

High Margin businesses are like Alexander. He did great things. It’s almost impossible for a common man to imitate his deeds. High margin businesses are like that.. They do big ticket deals. Small number of deals but great margins. It’s difficult to imitate them.. Eg. Fashion, Jewelry

High turnover businesses are like Abraham Lincoln. He did not do earth shattering feats. He did small things, down to earth deals.. But he did a 1000 small things, consistently over long periods of time, which put together made him a great leader. High turnover industries are like that. They do small things, yet make up these insignificant deals through volumes.. Eg. Retail stores

High leverage industries are like Mahatma Gandhi. Gandhi gained his fame not because of his own feats. He gained it because he could inspire a million others to follow him which ultimately led to the freedom of an entire nation. Would a strategy of non-violence be exactly effective, if people were not ready to follow him? High leverage industries are like that. They use so little of their own money, get others to lend them money and manage to make a neat profit using the entire pool of cash.. Eg. Financial institutions

DuPont Analysis is a great way to look at businesses. Understanding these levers of business can help us identify and profit from opportunities.

An year since placements

Its almost a year since my placements concluded at ISB. I was browsing my hard disk and going through the list of companies to which I had applied while at ISB.

Here are the statistics:

• Number of companies applied through placements - 37
• Number of shortlists - 11
• Number of offers through campus - 5
• Number of off-campus offers - 3

Here is some interesting stuff on what had happened to these 37 companies over the past one year:

• 18 of these 37 are listed
• The average drop in the share prices of these 18 firms (since the time i had applied) is 62%. The range is 19 to 81%
• Of these 18 firms,
  5 firms have been bailed out
  1 has been taken over
  1 restructured
  1 expected to default on its loan in the next 3 months

Its interesting that i finally took up an offer from IFC,

• To which i had never applied
• Never knew that such a job existed even 2 days before placements
  

And yet IFC is probably one of the best spots to be in, in today's environment (as compared to the 37 companies i had applied)

Moral of story:
Most often we do not recognize if its a blessing or a curse when something hits us. You can well imagine the anxiety i went through when my strike rate at ISB (Shortlists/ Applied) was not that good. There was a point of time during placements, where I had rejected almost every offer I had got and the future looked totally uncertain. Yet in the hindsight, when you are able to connect the dots, it all ends well. Take life as it comes. Have faith - In yourself, in your destiny and in god.