Retail Investing · Equity & Fundamental Analysis
Business Models
How a company makes money — the starting point of fundamental analysis.
5 concepts. Foundation literacy for retail investors.
- Retail Investing
- Easy level
- 5 concepts
- 5 practice questions
1Where revenue comes from
Start with who pays the company and for what. A clear revenue engine is easier to analyse than a vague story.
If you cannot explain the customer and the product in two sentences, pause.
Figure. The revenue engine is a loop you should be able to narrate in two sentences: the company makes something, a named customer gets the value, and money flows back. If any arrow is vague, pause.
| Item | Fact |
|---|---|
| Customer | Who pays |
| Product/service | What they buy |
| Repeat? | Subscription, repurchase, one-off |
The first business-model question is usually
- Who pays the company and for what
- What is today's GMP
- What colour the logo is
Customer + product.
2Unit economics intuition
Ask whether each sale or user is likely profitable after direct costs, and whether scale helps or hurts.
You do not need a full model on day one; you need honesty about margins.
Figure. Each bar is one unit sold at a price of 100. If scale pushes the direct-cost share down, the margin slice widens; if it does not, growth adds volume without adding profit per unit.
| Item | Fact |
|---|---|
| Price | What customer pays |
| Direct cost | What delivery costs |
| Scale | Do costs fall as volume rises? |
Unit economics roughly asks
- Whether each unit/customer is economically sensible
- Only the Sensex level
- Whether SEBI likes the logo
Per-unit sense.
3Cyclical vs steadier demand
Some businesses swing with the economy or commodity prices; others have steadier demand. Cyclicality changes how you read a "great year."
Peak earnings in a cyclical firm can mislead.
Figure. Two earnings paths. The cyclical firm's record year sits at the top of a wave that later turns down into the marked downcycle; the steadier firm plods upward. Valuing the wave's peak as if it were the plod is the trap.
| Item | Fact |
|---|---|
| Cyclical | Earnings swing with cycle |
| Steadier | More stable demand |
| Trap | Paying peak multiples on peak earnings |
For a highly cyclical business, a record profit year
- May not be a safe base for forever valuations
- Always means risk disappeared
- Means debt is irrelevant
Mind the cycle.
4Why customers stay
Early moat thinking: switching costs, brand, network effects, cost advantages. Without a reason customers stay, competition erodes returns.
Full moat topic comes later — plant the question now.
Figure. Four common reasons customers keep paying, all pointing at the question that matters. Without at least one real arrow into the middle, high returns invite copycats and erode.
| Item | Fact |
|---|---|
| Switching cost | Hard to leave |
| Brand | Preference / trust |
| Network | Value rises with users |
A simple moat question is
- Why will customers still pay you in five years
- What is the grey market premium
- How to skip reading statements
Why they stay.
5Capital intensity
Some models need constant heavy investment to grow; others need less capital. Capital intensity affects free cash flow available to owners.
High growth that consumes endless capital can still disappoint shareholders.
Figure. Both firms generate the same 100 of operating cash. The capital-heavy model must plough 75 of it back just to keep growing; owners live on the free-cash slice that is left over.
| Item | Fact |
|---|---|
| Capital light | Less reinvestment per growth |
| Capital heavy | Large ongoing investment |
| Owner cue | Watch free cash flow |
Capital-intensive growth often means
- More reinvestment before owners see cash
- Automatic high dividends always
- Zero business risk
Cash can be trapped in reinvestment.
Notes
- Start with who pays the company and for what. A clear revenue engine is easier to analyse than a vague story.
- Ask whether each sale or user is likely profitable after direct costs, and whether scale helps or hurts.
- Some businesses swing with the economy or commodity prices; others have steadier demand. Cyclicality changes how you read a "great year."
- Early moat thinking: switching costs, brand, network effects, cost advantages. Without a reason customers stay, competition erodes returns.
- Some models need constant heavy investment to grow; others need less capital. Capital intensity affects free cash flow available to owners.
Formulas
- Who pays
- What customer pays
- Earnings swing with cycle
Exam traps & shortcuts
- Revise the table pegs before any quiz.
Reference tables
| Peg | Fact |
|---|---|
| 1.Where | Who pays |
| 2.Unit | What customer pays |
| 3.Cyclical | Earnings swing with cycle |
| 4.Why | Hard to leave |
| 5.Capital | Less reinvestment per growth |
Recap
Keep these pegs.
- 1.Where
- Who pays
- 2.Unit
- What customer pays
- 3.Cyclical
- Earnings swing with cycle
- 4.Why
- Hard to leave
- 5.Capital
- Less reinvestment per growth
Practise Business Models
Reading is free and needs no account. Practice, mocks and progress live in the app.
- 5 exam-style questions on this topic, with explanations
- A 5-question practice set that ends the chapter
- Timed mocks scored with the real marking scheme
- Readiness tracked per topic, kept on your device