How Finance Works
14:02: mess of capital markets
20:11: the problem of asymmetric information might be a reason of this mess
22:45: The shift from profits to cash flow is one of the most important changes in the way we measure business performance
33:22: the critical role of Working Capital
Finance recipe for value creation:
- finding a favorable gap between investment return and capital cost (ROIC > WACC), via "Product and Process Innovation"
- maintain that gap for long time. This means creating a sustainable competitive advantage, with "barriers to entry, brands, patents"
- reinvest capital at those high returns. How? -> Growth
54:59: capital allocation as a two-stage process
Finance is far more than money. It's all about information and incentives.
The recipe for value creation emphasizes cash rather than profits, beating your cost of capital, then doing it as long as possible and grow.
Allocating capital is arguably the most important that managers do, because we are stewards of other people's capital.