Lost amongst the endless mass of financial commentary on Twitter, Substacks, and Podcasts is a genuine understanding of what drives value for owners. We all see the fanfare displayed over reported numbers and next quarter’s guidance. Very little discussion is reserved for the quality of any of these reported numbers.
To orientate ourselves, let’s begin with a familiar refrain:
The value of a business is the discounted value of all it’s future cashflows.
A lot of brainpower is focused on this first part of this timeless dictum. This should be expected. The latter part, on the other hand, requires insight. As I have written about several times, predicting the future is not an easy endeavour. It’s more art than science.
Appropriately handicapping the opportunity cost of capital for various business opportunities is important, but perhaps not as important as figuring out how much cash said business opportunity will disgorge to you over it’s lifetime. All things being equal (I cringe even writing the words) a growing stream of income is worth more a constant amount of income. If we can agree on this - and I think we can - we can also agree that a growing stream of income is worth a higher multiple of current income than a no-growth stream of income.
This isn’t to say that all companies currently growing their sales and earnings are creating value for their owners. Some of them may not be worth much to their current owners at all. I’ll digress - the question becomes: when does growth add value for owners/shareholders?
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