The myth of heavy assets

At present, many investors prefer “asset-light” companies and reject “asset-heavy” companies.

Let’s first define the difference between “asset-light” and “heavy-asset”.

When we say that a company is an “asset-light” company, it usually means that the company’s main assets are intangible assets such as databases, patents, copyrights (such as Internet companies, media companies), or the company is “brain-intensive”. Companies” (such as law firms, audit firms, fund management companies)

When we say that a company is a “heavy asset” company, we usually mean that the company’s main assets are tangible assets such as mines, oil fields, railways, ports, power stations, and real estate.

Most investors prefer “asset-light” for a very simple reason – asset-light companies are more likely to achieve “high growth”. This is indeed the case. If a coal mining company wants to expand, it can only buy more mines. Under this model, its growth limit is predictable and calculable. And a company with “data” as its core asset is more likely to break away from the shackles of assets and achieve “explosive growth”.

The above is the side that most investors have seen, or the side that most investors “would rather see”.

However, every coin has tails. If you’re a conservative investor, conservative investor means, think about the bad in advance, and you’ll quickly discover that asset-light companies are more dangerous.

Two perspectives to observe enterprise value: 1. Operational value; 2. Liquidation value.

When a company with heavy assets, such as a “mining company” or “real estate company” is not operating well, its assets are still valuable.

However, when an asset-light company does not perform well, its value quickly decays to near zero. Because it has nothing “to liquidate”.

To use a bit of a straight man’s analogy: the difference between a “heavy-asset company” and a “light-asset company” is like the difference between a “heavy-armored cavalry” and an “assassin”.

Even if a heavily armored cavalry dies on a horse, the heavily armored, seated warhorse, machete and spear, strong bow and powerful crossbow are all valuable, and even some broken silver can be found in the saddle bag.

And if the assassin dies, in addition to the belief in his heart, there is only the dagger on his waist. It is true that a single assassin is more likely to shake the world in a short period of time than a single heavy cavalry. But when the history becomes long enough, we will find that the vast iron cavalry still constitutes the cornerstone of the world and affects the direction of the world.

Note, I’m not saying “asset-heavy companies are better”. I mean, there’s no obvious good or bad, just “different”.

In addition, there is a more common misunderstanding. Many people think that companies with heavy assets have problems with their business models, and the money they make is fake money. Because asset-heavy companies must continue to use their profits to purchase new production equipment in order to maintain current profits.

However, if you keep asking, “Why? If what you’re saying is true, what’s the problem?” You’ll find that most people can’t answer.

Let’s talk about what happened today.

First, it can never be a problem with the “business model” itself. “The money you earn must be used to buy equipment?” There will be no SB business model in the world, and no entrepreneur will accept this business model.

The problem is at the “accounting” level. Many production-oriented companies need to continuously purchase production materials, and this logic is no problem. However, purchasing the means of production, like hiring production personnel, is a part of the cost. Profit = Revenue – Cost. That is, after deducting all costs, what remains is profit!

When did the question of “must” take “profit” to buy new equipment? Note the two words, “must” and “profit.”

Generally speaking, whether profits are used for “reinvestment” will only affect “expansion” and will not affect the original “production”. In other words, if a sum of money is not used to buy equipment, it will affect the original “production”, then this money is not actually a profit at all!

Under what circumstances does this happen? When the “depreciation rate” is wrong! You spend 1 billion yuan to buy a piece of equipment that is expected to last for ten years, so it is amortized and depreciated over 10 years. As a result, the device was phased out in three years and could no longer be used. So you have to take out the “seemingly earned money” on the books in the past few years and buy a new device.

Now ask: 1. What is the problem? 2. Whose problem is this?

The answer is obvious: this is a problem of business strategy, this is a problem of entrepreneurial talent, not a problem of “business model”, not a problem caused by “heavy assets” itself!

“Asset-light” companies face the same problem. And in many cases, the so-called asset-light companies actually have a lower fault tolerance rate. If you buy a mine, it will still be a mine if the coal price falls; if you buy equipment, it will still have residual value if it cannot be used. You spend money to develop an APP, and no one uses it, it will be in ashes.

Well, this question has been roughly clarified at this point.

Finally, a brief summary:

1. Asset-light companies are better when they are good, and worse when they are bad.

2. Asset-heavy companies, as literally, are more “stable” because they are more “heavy”.

3. There is no problem with the asset-heavy model itself.

“Investment Essentials” web link

“Wealth Tools” web link

“Konoha Qingxuan” web link (the novel I wrote, after reading the first five chapters, if I don’t get addicted, I will lose. The investment principles that cannot be “deeply explained” are all written in the story)

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