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Whenever a business analysis is done – there are always two kinds of views that are presented to the world – . One is “Theoretical View” & other is “Realists View / Practical View as per present day dynamics, the business operates in”. This is one of the reasons why i most often emphasise that, as an investor – one needs to analyse business from both the sides & make sure you segregate your views into these categories and only then begin your analysis with all rationality. Remember end of the day – all analysis one can draw are most often hypothetical in nature & thus face difficulties in testing these hypotheses. Why is it difficult to test? Well, for the simple reason that every business is different & its impossible to quantify each of the businesses based on their business motivations & expectations in the areas they operate in.
‘Theoretical View’ Of Businesses Run By Large Companies & Small Companies:
Based on their current market capitalisation, companies are classified into large-cap, mid-cap, and small-cap. What is market cap? Let’s say a company has 10,000 outstanding shares in the market, and each of them is priced at Rs 10. Thus, its market capitalisation will be: outstanding shares * price per share. i.e. 10,000 * 10 rs = RS 1,00,000 (Market Cap).
Now lets understand the difference between large cap companies stocks & Small cap company stocks. In the Indian context – Company’s market cap is >RS 20,000 CR – are identified as Large Cap, companies Market Cap between RS 5,000 – RS 20,000 CR – are identified as Mid Caps, Companies operating lesser than RS 5,000 market cap are identified as Small Caps.
There are several business layers which contributes to the conduct of these businesses which act like key parameters while valuing these companies from an investment perspective. Below are few key parameters.
- 1. Market Presence:
Large-cap companies have strong market presence and their stocks are generally considered to be very safe (low risk). Most of these companies regularly disclose information through media, such as newspapers & other television mediums. In other words, information on large-cap companies is very readily available.
On the other hand most small-cap companies are either start-up enterprises or companies in the development stage. Understandably, they have low revenues and a small number of employees and clients. Information on these companies isn’t easily available to all.
- 2. Capital Structure:
Capital is like oxygen for any business & all key driving factors such as expansion, diversification, for staying float in competition requires extensive access to capital. Large cap companies stand to benefit in this section as they have relatively easier access to capital. This would help most business to thrive alongside competition as & when they see newer business opportunities.
Most small cap companies build their capital structure at a very high cost, as the lenders value their business as ‘risk prone’ & hence higher to risk to capital leads to higher borrowing cost. Due to limited capital base – there are many market barriers while they try to penetrate into newer markets. So this leads to lesser cost benefit advantage in terms of gaining additional market share.
- 3. Differences in Market Niche:
Another difference between small businesses and large companies is that small companies often focus on a niche market, while larger companies tend to offer more products and services to a wider variety of consumers. A small company with only a few employees might be able to make enough money to survive by selling a single product or service in a very specific market. As companies grow, they tend to branch out into new markets and offer new products and services to increase sales and hire more employees.
Remember product mix is one the key elements of that is part of product placement & this adds money directly to the balance sheet of a company. For Ex: Future Retail of India is a leading retailer that operates multiple retail formats in both value and lifestyle segment of Indian consumer fashion market. For people who look for value (economical) in fashion trends – they can shop at Brand Factory, Big Bazaar or Central malls etc. While people who look at fashion as a life style & brand conscious can shop at Exclusive brand show rooms like Indigo Nation, Scullers, John Millers, DJ&C, Buffalo etc. This was just an example to make you understand – how product mix & placement of the same product to match future trends is extremely important while you assess companies & their brand structures.
Realists View / Practical View Of Businesses Run By Large Companies & Small Companies:
Above were few pointers amongst many which you could keep in mind while you base your analysis from a theoretical point of view. This will help you to set up a base case with a clearer sense of rationality. Whilst it’s equally important to have a practical view as well, this will help you to evaluate future trends in the market & to judge how best a business may be able to adopt newer trends foreseen in the market that each of the businesses operate in.
This where the big & small companies have their fair share of pro’s & con’s. Smaller companies with liberal management approaches would be in a better position to seize newer opportunities & be the first hand adopters to set a trend in the market for bigger companies to follow. This dimension can be easily explained with the entry of e-commerce into India during the last decade or so. Companies like Flipkart, Ola, PayTm fall under this category, which thrived for existence as small companies which later went on to become bigger companies. Innovations are very streamlined coupled with the right sense of motivation by a simpler management structure is an advantage that a smaller company enjoys.
Well, these were few pointers that could help you in choosing the right approach to investing of your hard earned money. There are no thumb rule for any investments, it helps best when one learns & understands various approaches to investing. Key aspect to remember is – just like ageing of human’s, even investing approaches mature. Developing a flexibility to learn & unlearn different approaches holds the key to a successful investing habit.
– Article by Suman Adithya Rao (SEBI Certified Research Analyst, Management Graduate in Entrepreneurship & Small Business Management)
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