Is the company’s business model understandable?
Updated: May 11
In simple terms how does the company makes money?
Unless you understand what generates cash for the company, you cannot think of investing in that business. You need to understand how the company generates cash. Oftentimes you may be fascinated by a tech firm, but if you don’t understand the business model and what the company does so that customers land up paying, you will do an injustice investing in that company.
You need to describe the nature of the company’s business, whether it’s a product company or a service company. Does it have clients outside the domestic region or is it a global company? Who are the major customers? whether it is a business to business, business to consumers, or business to a government company.
So, understanding the business model will give you the starting point in terms of what is the overall value chain of a company. The set of activities that an organization carries to create value for its customers.
For companies that make products, a value chain comprises steps that involve bringing a product from the idea stage to distribution. You need to know where the raw material is being procured, where are the manufacturing units, what are the marketing activities, etc. In the case of a service business, how does a company do marketing? what is the service delivery? how is the customer relationship?
You may find information to perform this analysis by looking at industry material, interacting with the industry associations, and/or reaching out to the investor relations department of the company to build this understanding.
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Details of the advisor
Advisor: Ankur Kapur
SEBI RIA No.: INA100001406
BASL Member ID: BASL1337