The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit (Little Books. Big Profits) by Damodaran Aswath

Author:Damodaran, Aswath [Damodaran, Aswath]
Language: eng
Format: epub
Publisher: John Wiley and Sons
Published: 2011-03-28T21:00:00+00:00

Value Driver #1: Scalable growth

The faster you grow, the larger you get. The larger you get, the more difficult it is to keep growing. How good is your firm at scaling up growth?

To get from revenues to operating income, we need operating margins over time. In many growth firms, the current operating margin will be either negative or very low, largely because up-front fixed costs associated with infrastructure investments as well as selling expenses directed towards getting new clients (and future growth) are counted in the current year’s expenses. As the company grows, margins should improve. Conversely, some growth companies enjoy super-high margins because they have niche products in markets too small to attract the attention of larger, better-capitalized competitors. As the firm grows, this will change and margins will decrease, as competitors emerge. Under Armour’s success with microfiber apparel is a good example; in the initial years, larger players like Nike ignored it but are now introducing their own competing products.

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