Colin Barry

RightNow (EF, Wednesday, Week 5)


Another way to think about FCF valuation: a function of revenue growth rate (g), profit margin (p), asset intensity ratio (a), and discount rate.
Tricky part: thinking about asset intensity and profit margin, especially as business model changes.

Asset intensity:
Cash => separate cash needed to run business ("daily caloric requirement") from cash lying around ("% body fat).
Asset intensity = [Fixed Assets + Net Operating Working Capital] / Sales
NOWC = (Current Assets + Deferred Receivables -- Cash) -- (Current Liabilities + Deferred Revenues -- Debt)
Basically, combines NWC and fixed assets. Subscription-type business models generally have low or negative asset intensity. Manufacturing has high asset intensity.

Forecasting into the future: as much guesswork as science. Try to tie to expected business realities --- if we have to hire an enterprise sales force and accept a long sales cycle, asset intensity will go up.

To check your math/gain insight into investors' thought process: back out investors' rate of return in likely states of the world. If the firms gets acquired for $200mn in five years, what will rate of return be for Round A investors? This will drive most of their decision-making/preferences.