I first learned about this rubric from Geoff Gannon on Focused Compounding. When looking at a company’s cash flows, one of the things to look out for is Free Cash Flow > Net Income (FCF > NI).
One of the most important heuristics (and possibly mental model) that I’ve been learning to apply when looking for great investments (in product and business) is how the management telegraphs and frames their position and/or product.
One of the ways I intuitively infer if a company continues to grow well and potentially has some kind of scale economics is if the Gross Revenue is growing faster than the growth in the operating expenses side over any given period.
Geoff Gannon from Focused Compounding has highlighted these to be his defense-in-depth approach when it comes to evaluating a potential investment: Price: 2/3 or less than the average company in that industryIndustry: better than most industriesManagement: better than most management teamsPosition in the industry: better company and above average in this industry Some industries included in the discussion were: Advertising AgenciesBanks The best companies Geoff had found were what he called poorly-run business in an above-average industry.