Capital-intensive businesses generally make for sickly investments. In this, the first of a three-part series, we examine why.
They say 'what goes in one end comes out the other' and, while it may be true of babies, it ain't always the way with companies. Some companies suffer from serious indigestion and what goes in may not come out at all. Even when it does, it can get stuck for quite a while before making a reappearance, which amounts to pretty much the same thing—since money's worth less to you the later you get it.
This 'corporate metabolism' is something that we often refer to indirectly—when we scoff and describe an industry as 'very capital intensive', or when we talk excitedly of a company that 'possesses excellent cash flow characteristics'. So in this, the first of a three-part Investor's College series, we're going to take a look at how overweight, 'capital-intensive', companies differ from the lean and mean, and why it matters. In the second and third parts, we'll crunch through some practical tests on company balance sheets and cash flow statements to help you to sort the wheat from the chaff.
Visit The Intelligent Investor for the rest of this article on corporate metabolism and to find out more about value investing.