Lots of sell side models are pretty poor when it comes to this - maybe they will do a semi-detailed topline build off of users or a TAM penetration rate or ASP x Volume X mix, but when it comes to all the cost line items, they are usually running % of sales.
I am looking at getting better at diving deeper into unit economics and margin builds, and was wondering if anyone had some good resources they could point me to.
Are there any good resources that people could point me towards / any examples of these models? I think having it laid out would help me conceptually, and so just seeing the flow through of different cost builds would be helpful. The most important details that matter here are the reasoning behind the assumptions / flow through - which I understand - but sometimes I feel a bit directionless without having been exposed at all to previous examples of why certain builds were picked and for what reasons.
Did you IB folk get exposed to this in more detail? Was it all brand new starting at a HF where someone walked you through this in a bit more detail? Sell side models don't typically seem to resemble what I hear being preached for best practices when it comes to buyside stuff as well... idk. I have access to a couple brokers' sell side models so if a company/broker comes to mind maybe point me to their work - or if anyone has a stale/old template or model (longshot I know).
You can figure this stuff out pretty easily, rarely is it "taught". Usually, you see someone else's model and realise what they've done. Margin builds etc are usually disclosed by the companies themselves too.
Growing cost items as % sales can be fine if it makes sense, sometimes if its a cost mgmt can leverage you can code a growth rate manually.
makes sense - I mean I do this already for a few things, recently worked an EBITDA bridge into a model, and then also when I model E&Ps (obviously costs tied to production).
Your point on "seeing someone else's model" is pretty much what I am saying though - in that I never get to see someone else's models. My access is limited to sell side models from 3 brokers (does not resemble what I hear being preached when it comes to proper buyside process), and then my current firm (primarily yearly and somewhat template like in some aspects), and then my own models that I build as I want to break into new positions.
So in a sense, more about trying to "check" my process against what is being done and make sure it is the right track (and not show up to an interview and it is blatant that what I am doing makes no sense / makes them think "this was a really weird way to do it"). And then, there is a totally separate part about just wanting more reading resources and materials to improve and ask these questions to myself more often. Anyways, I think I know the gist of most of it, just need to spend more time working through it I suppose.
Doing an EBIT bridge is a good way to drive your costs, but you can still miss some cost drivers while doing it. Unfortunately, I haven't seen any sellside model that breaks down costs granularly.
You know, at a certain point, you just need to get the job and then pick stuff up there. If you're doing EBIT bridges etc, you're already thinking about costs in a much better fashion than most IB applicants vying for HF.
I think you can get pretty far by just breaking things down into variable vs. fixed expenses and can get more granular from there if you want (i.e., employees x salary, customer acquisition components, etc.)...this is generally achievable just via a 10-K read and some transcript scraping. A flat % of sales approach negates the impact of operating leverage going both ways and will distort your below the line outputs. I take medium term views and have been pretty accurate.
Thanks. When historical incremental margin trends have been all over the place, how do you figure out what's the incremental going forward tho?
You said you used mostly public source to figure out variable vs fixed? I heard from investors they just ask IR, which us retail guys they won't respond to us.
Like, for example, how do you figure out how much a SaaS name needs to spend as "maintenance sales and marketing"?
don't model off incremental if this is the case, incrementals are only useful for certain companies/industries and as an approxim for fixed cost vs variable cost splits. Incrementals don't let you properly capture declining costs (raw materials/mgmt levers) or even pricing.
lf you just start with learning about the biz, it should emerge to you what you need to focus on re: model drivers and then it should also emerge what sort of things are knowable/trackable and vice versa
Figure out what they do, what happens inside the company when sales grows/decline? Is there excess capacity? How much more can they produce? Do they need to hire more people? Or materials? Shipping costs? What are the pieces levers that matter most for upside/downside? Which are under mgmt control vs macro?
When you have a company with many business units, say 3, how do you split items like COGS, R&D and G&A, Tech etc if the company does not disclose a breakdown of how its spread out across the 3 business units?
On fixed and variable, how would you estimate this if again there is no further granularity?
Any help or examples would be awesome!
Compare those cost lines growth with the revenue growth over the past.
You'll quickly see what is fixed/variable/semi-fixed.
It'll be an approximation but it's still way better than just making no assumptions.
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