Why is growth the most important metric?June 15th, 2019
My name is Jeff. I am going to buy a lemonade stand. This lemonade stand costs me $100. But for every $80 I spend on labour/ingredients expenses, I make $100.
My first year, I only ran the one stand. I spend $100 on the stand and $80 on expenses.
So I ended up -$80. Instead of learning my lesson, I did it again the next year. I spend $100 on a stand and $160 on lemons to earn $200. But I still lost $60.
The next year I decided to add 4 more lemon stands and spend $80/each of the 6 acquired lemons stands to make $600, but paid ($400 + $80*6) = $880. So I lost an extra $280. Things are looking pretty bad right now if you are measuring me as a company that makes money.
I continually lose money and it seems to be getting worse. But the next year, I level off a bit. I am going to add 4 more lemon stands this time and see how we do. Now I have 10. That is $1200 in expenses to make $100/each. I still lost $200. I said I was going to do better, but I still lost a bunch of money. To make things worse due to the several hundreds of dollars I already owe, I have to pay an additional $56 in interest.
So now I am down $666 dollars.
Now you are really starting to doubt me. My continued debt is looking pretty bad and now the interest is starting to compound and make things worse. So I cut back some expenses and figure out a way to spend only $70 to make $100. And I only buy 2 lemon stands this time that will only be $200 and I have 12 stands so $70*12 = $840 + $200 = $1240 in expenses. Only to make $1200 and still lose $40.
Jeez, will it ever get better? So I have to tighen things up more. I figure out a way to get the $70 expense down to $68. And Carlos notices my 12 stands and asks if I would want them made for $95. I tell them no, I can't afford to do any more right now.
So I buy no new stands and I spend (68 x 12) = $816 on expense to make $1200. Hey look, I made $384! But, I mean, I still owed $766 factoring in more interest so... now I pay off half my debt. And then I do that again (no new growth this year) and pay off the other half.
Now, I have broken even. I have made $0, but I have 12 lemonade stands that can make $100 for every $68 spent. I decide to take Carlos up on his offer and I double down to do it all over again. But since I have income from the first 12 stands, it takes me half the time to double again to 24. And in the same time I can double to 48 from there.
But now, when I stop spending, I can make ($100 - $68) = $32 * 48 = $1536.
You were worried about me in the beginning right? Thought I would never make money. All the while I was growing my production volumes up and up. When I had $50+ in interest, you were concerned.
If the economy tanks, or if the price of lemons goes up, I look for efficiencies to keep by cost to profit ratio at ~7:10. It might happen that some location forbids me to sell lemonade there costing me additional expenses. It might be that one of my cups are contaminated with something not good. It might happen that my employees quit, or steal from me. It might be that there is a shortage of lemons or a lemonade stand burns down.
But once I have growth backed by a product people value, it doesn't matter what currency I sell it in. It doesn't matter the bumps along the way. It doesn't matter if I tell you that I am going to have grape lemonade by the end of the year and don't get that until 6 months after I said I would.
The value is profit = revenue - expenses. Revenue and expenses are amplified by increased production to meet increased demand. Getting expenses down also helps increase profit without jacking margins to increase revenue.
If you are betting against a company that is losing money, make sure you aren't betting on the ones that are doing so to increase production.
If you are short TSLA... you may want to rethink that:
I am TSLA Long. Model 3 Owner. Brother of a Model 3 owner. Son of a Model S owner. I have reservations for Slate Roof and Cybertruck. I am a Tesla speculator and fanboy. I am not a financial advisor. Investing in anything comes with inherent risk.
I proudly support the following Patreons:
The following YouTubers help support my TSLA long bias through stock price volatility. +Great insights.
- Tesla Daily Podcast
- The Limiting Factor
- Now You Know
- Dave Lee on Investing
- Financial Education
- EV Stock Channel