Growth potential, sustainability, stability (cyclicality), and certainty

These keywords mainly describe various characteristics of companies,

including business characteristics,

industry characteristics,

and operational characteristics,

all of which are fundamental concept keywords.

I must express them clearly,

and when discussing industries or companies later on,

these keywords will be mentioned,

I hope everyone can have a clear understanding of the true meaning of these keywords

and the underlying logical relationships,

so as to avoid misunderstandings.

I want to clarify these from both valuation perspectives

and other aspects.

First, let’s talk about “Return on Net Assets” (ROE),

ROE mainly describes a company’s current profitability or historical profitability.

ROE is related to profit margin,

turnover rate, and leverage,

primarily reflecting a company’s profitability.

In the future, when I mention a company’s profitability,

I am referring to ROE,

which is what we often call ROE.

ROE is a very important indicator used in company valuation,

because we can only see the company’s current profit situation,

while the future profitability can only be estimated through valuation.

This leads us to the second fundamental concept: “Growth of Corporate Profitability,”

which involves a company’s pricing power,

cost reduction,

leverage utilization, and so on.

If you’re interested, you can look back,

I have discussed a few episodes earlier about corporate growth.

Corporate growth is actually easy to understand,

it’s the growth of profits.

The growth of a company’s profits is closely related to valuation,

how much the company’s future valuation will be,

expectations for earnings,

and amplification, among others.

The third is a company’s “Sustainability,”

Sustainability refers to how many years the company can survive in the future,

and whether it has sustainable profitability.

We all know about Jia Yueting’s LeEco,

LeEco’s stock price once experienced huge growth over three or four years,

short-term growth was very good,

but once problems arose,

the company’s sustainability suddenly disappeared.

A company with good growth but poor sustainability,

LeEco is a very typical case.

Sustainability is usually related to the demand for the company’s products.

The sustainability of the Baijiu industry is very good,

because people will always drink Baijiu,

so the demand for the product remains.

Electronic products tend to be less sustainable,

from the perspective of companies and products,

technology updates very quickly,

today’s black-and-white TV might be replaced by color TV,

then HD TV,

LED TV, etc.,

and there has also been excessive competition within the industry.

External demand changes also play a role,

technological updates may cause products to become obsolete,

for example, in the past, travel was mainly by horse-drawn carriage,

with the advent of cars, demand for horse-drawn carriages disappeared.

Similarly, people used to use traditional mobile phones,

now they use smartphones,

it’s hard to predict what phones will be like in the future,

perhaps people will no longer need phones at all.

Moutai liquor will likely still exist in 100 years,

don’t just look at Apple’s products being sold worldwide,

but whether Apple phones will still be around in 50 years is uncertain,

maybe new devices will emerge to replace phones.

Although Apple is a great company,

the future is hard to predict,

this is what we call sustainability.

The fourth is “Stability,”

Stability refers to cyclicality.

Some industries, over three to five years,

have steady revenue in the first three years,

but struggle in the next two years,

then improve again after a few more years.

Steel,

cement, and other industries are cyclical.

Cyclical companies experience large fluctuations in profits,

because costs are relatively fixed,

so fluctuations in revenue lead to fluctuations in profits,

sometimes profitable,

sometimes not,

sometimes they profit in the first two years,

but in the third year, they might wipe out all previous profits,

making cyclical industries less stable.

However, many cyclical industries can continue indefinitely,

such as the steel industry,

because steel demand will always exist.

Don’t dismiss their future sustainability just because of cyclical fluctuations,

it’s important to distinguish between sustainability and stability.

The fifth concept is “Certainty,”

Certainty actually divides into two types,

subjective certainty and objective certainty.

Let’s first discuss objective certainty,

which is the certainty of a company’s operations.

Objective certainty is somewhat like a combination of sustainability and stability.

A company that can survive continuously,

with reliable management,

good corporate culture and operations,

products that always have market demand,

and an industry that isn’t shrinking,

this kind of certainty reflects an objectively stable state.

Objective certainty may encompass more than just sustainability.

On another note, if a company has performed well in recent years,

and is expected to continue doing so,

with weak cyclical effects,

good stability,

and minimal performance fluctuations,

it can operate continuously.

If a company’s performance fluctuates greatly,

its certainty is relatively low.

For example, if a company’s sales this year are 100 million yuan,

but next year, sales could be 50 million or 5 billion,

with no clear expectation,

such a company’s certainty is poor.

Cyclical industries tend to have this characteristic,

and this kind of certainty is objective certainty.

Subjective certainty refers to how well you understand a company,

and how confident you are in your judgment,

often called the “circle of competence.”

Subjective certainty is also very important.

The reason I am summarizing and explaining profitability,

growth, sustainability,

stability (cyclicality), and

certainty again,

is mainly because many people interpret these concepts differently when discussing them in articles.

Here, I want to clarify my understanding of these keywords,

so that in my subsequent programs on company or industry analysis,

there will be no misunderstandings.

I hope everyone, when learning any field,

will clarify the definitions of key terms,

for example, when studying law,

it’s necessary to clearly define basic legal terminology.

Only by clearly understanding these keywords’ concepts

can we communicate on the same platform.

Clear expression of basic meanings prevents misunderstandings,

and that is the main purpose of this episode.