What is the capital chain?
Investor: Mr. Pai Pai, you keep repeating the importance of the capital chain. What exactly is the capital chain?
Pai Pai Paijun: As the name suggests, the capital chain refers to the basic circulating capital chain required to maintain the normal production, operation, and operation of an enterprise. It is the basis for an enterprise to achieve a virtuous cycle of cash-assets-cash (value-added) in the production process.
To put it simply, a company is generally short of money in the early stages of its establishment, but it needs funds to purchase production equipment, raw materials, labor, etc. At this time, he will find other people to borrow money, such as bank loans, or issue bonds himself, etc. After getting the money, the company can happily produce its own products, and finally sell the products to customers to obtain a certain amount of funds.
Of course, the final funds obtained after the sale are not all the company's own, because he needs to return the principal and interest of the money he borrowed. If the company is a high-quality company, then usually after the principal and interest are returned, There is a certain balance, and the company can use this money to expand scale and reproduction, or it can save it to expand its own funds, and even pay employee benefits, etc. After this journey of corporate operations, the chain in which corporate funds circulate is what we call the capital chain.
How important is the capital chain?
Investor: Oh, that’s it, I understand. Pai Paijun, if the capital chain is so important, how does it affect a company?
Pai Paijun: The management of the capital chain is a very important link in corporate financial management. Sometimes there are many The bankruptcy of a company is not due to problems with its profitability, but because of problems with its capital chain. If a company's capital chain is broken, it will not have enough cash flow to deal with some external risks. Even if it encounters a good project, it will have to give up. Some companies may even be unable to return principal and interest in time, which will make investors Producing a panic effect, frantically running on the company's bonds or selling the company's stocks, investors' cash-out behavior will eventually worsen the company's capital chain.
Let’s give a small chestnut. If a company is compared to a person, then the person's ability to run fast, jump high, and lift heavy is the company's profitability, and the person's respiratory system and blood circulation system are the company's capital chain. Even if this person is able to push the mountain with overwhelming energy and let him not breathe for 10 minutes, he will still go into shock and collapse. This is the importance of the capital chain. In order to avoid your own irrational investment behavior, you can also leave your investment to professionals. For example, there are many private equity funds on the Internet that do not charge subscription fees.
How to identify companies with good or bad capital chains?
Investor: Wow! Why is the capital chain so important? So how should we eliminate those companies with bad capital chains when making investments? What about companies? For example, companies like ofo, I am quite scared to see.
Pai Paijun: A gentleman does not stand under a dangerous wall, and your concerns are very reasonable. There are some painful lessons in the market. The failure of Shi Yuzhu, the former "melatonin" giant group, and the subsequent collapse of Delong Group and Sanjiu Group were all due to the break in the capital chain, which led to the failure of business operations. In particular, in order to prevent financial risks, the country is currently tightening its monetary policy, making it easier than ever for companies to break their capital chains.
In fact, we can analyze the company's capital chain problem from the fundamentals of a company. Generally speaking, companies with good capital chains generally have the following characteristics.
1. Have stable profitability
Whether a company can sell its products and whether it can sell them at an advantageous price is the foundation for the company to have stable profits. Companies with models and complete capital return systems generally have better capital chains. Just imagine, if Ofo made a lot of money every day, it would not be in the current situation of queuing up to refund deposits.
2. Have core competitiveness
If a company has mastered the "core technology" in the industry, congratulations to this company, it will become a leader in the entire industry production chain. "Fragrant pastry".
His suppliers are willing to give him money to buy raw materials on credit, and his buyers are afraid of not being able to buy his products at the first time, so they are willing to pay a certain advance payment. In this way, this company can "take it all" at will, and it is difficult to cause capital chain problems.
3. Have a large amount of cash assets
Cash assets can well solve the company's liquidity problem due to their ability to be easily converted into cash. Therefore, we can focus on the cash assets in the company's account to understand the company's "family background". Kweichow Moutai, known as the "King of A-shares", is the representative of such a "cash cow".
4. Have high-quality financing channels
Every family has hard-to-learn lessons, let alone a company. In the process of business development, there will inevitably be days when the company is "short of money." At this time, a company's ability to borrow money based on its "ability" is very important. Generally speaking, companies with high-quality financing channels are more resistant to external risks than ordinary companies. Of course, all borrowed money must be repaid. If a company has the ability to borrow money but cannot repay it, then we should classify such companies as a "minefield."
The structure of the capital chain in different industries is also different. We can interpret the specific situation from the company's financial statements, of which the cash flow statement is our general focus.