Over time, I’ve learned that fundamental stock analysis is rarely about one single metric or ratio. It is a bit like assembling a puzzle. Many pieces need to fit together before the full picture of a company becomes clear. Both qualitative aspects such as the business model and competitive advantages, and quantitative factors like growth, profitability, and debt levels, play their part. If you’ve been reading my Deep Dives, you already know how each of these elements contributes to understanding a company’s true quality. For a company to qualify as a true quality compounder, it should ideally combine as many of these pieces as possible. Some aspects are just nice to have, while others are absolutely essential.
Today, I want to focus on one of the most important parts of that puzzle: the business model. The list I’m about to share with you isn’t meant to be complete, but it highlights the points that matter most in my view. Of course, not every great company checks every box, but the more of these qualities a business model has, the stronger its foundation usually is.
With that in mind, let’s dive in!
1. Circle of Competence
The first aspect is the circle of competence. This first point is only partly about the business model itself and mostly about the investor. It describes how well a company can be understood by the analyst. To invest successfully, it is crucial to know how the company works, how it earns its money, and what the key drivers of its operations are. With that understanding, investors can recognize both opportunities and risks and use this knowledge to form a realistic view of the company’s future. The clearer and simpler the business model, the easier it is to analyze and the lower the risk of missing something important. Complexity often leads to wrong assumptions and hidden risks.
Another important point is that only those who truly understand a company can properly interpret developments around it, whether positive or negative. This understanding helps investors stay calm in uncertain times and gives them the confidence to act thoughtfully rather than reacting emotionally to short-term noise.
Lotus Bakeries is a good example of a simple and easy-to-understand business model. The company produces and sells biscuits, something almost everyone can relate to. Its main product, the Biscoff biscuit, is known around the world and supported by a growing range of spreads and snacks. The idea behind the business is straightforward: produce popular biscuits and sell them profitably. This simplicity makes it easy for any investor to see how the company creates value and generates steady cash over time.
In contrast, a company like Boeing shows how complex a business model can become. It‘s operations span multiple divisions, technologies, and supply chains that depend on countless interrelated processes and external partners. Their revenue depends on multiple interdependent processes such as advanced engineering, large-scale research and development programs, and highly specialized supply chains.
It is of course not necessary to understand every single technical detail of a business model, but investors should maintain a clear understanding of the business and how it operates. Doing so is much harder with highly complex companies and requires significant time, effort, and industry-specific knowledge. Simplicity is an advantage because it reduces uncertainty and leaves less room for error.
2. A Proven Business Model
Another important question is whether the business model has already proven itself in the market. Investors should avoid so-called story stocks whose success depends on uncertain future events or promises that have yet to materialize. Instead investors should instead look for a business model that is already working today and supported by solid numbers.
If a CEO talks about potentially launching a world-changing product in a few years, it might sound exciting, but it also means the company’s success still relies on speculation. Investing in businesses that have demonstrated real-world success provides a far more reliable foundation than betting on untested ideas.
3. Consistency Over Constant Reinvention
When examining a business model, consistency is also a key factor. Some businesses have barely changed their model for a century, while others must constantly reinvent themselves. The level of consistency often shows how stable and reliable a company’s business really is. Innovation and growth are of course vital for any company to remain competitive, yet the constant need to evolve can also introduce additional risks. Each phase of reinvention carries the danger of strategic missteps, execution challenges, or misallocation of resources. Industries that demand continuous adaptation often expose companies to technological disruption and volatile demand cycles. While innovation remains crucial for progress, excessive reinvention consumes time, capital, and management attention, often diluting the company’s strategic focus and increasing operational risk.
Companies like Rollins demonstrate that stability can be a powerful advantage. While the company continuously improves and modernizes its methods over time, its core business model remains unchanged. It does not need to reinvent itself every few years to stay relevant. This steady refinement allows for consistent operations and controlled growth without introducing excessive risk.
By contrast, industries with very short innovation cycles face a different reality. Consider a smartphone manufacturer that fails to release a new model for two or three years. It would likely be pushed out of the market as competitors introduce new designs, technologies, and features at a rapid pace. The constant pressure to innovate in such industries makes long-term planning difficult and exposes companies to higher risk.
In the end, it is about finding the right balance between innovation and stability, allowing a company to evolve without constantly having to change or reinvent itself.
4. Recurring Revenues and Predictability
Recurring and predictable revenue streams are one of the most reliable indicators of a stable business model. When income is based on repeat purchases, long-term contracts, or subscription relationships, it becomes easier to forecast cash flows and plan for the future. Predictability also creates a foundation for strategic decisions, investment planning, and operational efficiency. Companies that generate steady income from established customer relationships can better withstand market volatility and economic downturns. By contrast, businesses that rely on one-off transactions or sporadic demand often face higher uncertainty, making it harder to manage growth and allocate resources effectively.
Adobe’s subscription-based model through Creative Cloud is a textbook example of recurring revenue and customer retention. Once users integrate its software into their workflow, switching becomes rare due to both convenience and high switching costs. The company benefits from predictable cash flows and very low churn rates, creating long-term visibility and stability.
In contrast, large video game developers such as CD Projekt Red rely heavily on blockbuster releases to generate most of their revenue. Periods between major game launches can lead to sharp declines in sales and profitability, leaving the company dependent on the success of each new title. This hit-driven structure creates volatility and makes financial planning far more difficult compared to subscription-based businesses like Adobe.
5. Independence from External Factors
A strong business model stands on its own. It should ideally not be overly dependent on external factors such as changing regulations, political conditions, or government subsidies. Of course, some level of dependency on laws and the general framework of a country cannot be avoided, but it should never be at the core of the business model or determine whether the company succeeds or fails. When a business relies too heavily on such influences, it no longer has its development fully in its own hands and must instead depend on elections, political decisions, or the goodwill of regulators and authorities.
A good example is Greggs. The company operates in a simple and low-regulated market where demand stays stable regardless of politics or economic cycles. People always need quick and affordable food, which makes its business largely independent of external conditions and ensures steady demand over time.
Another good example is the already mentioned company Rollins, because pest control is naturally subject to regulations and safety standards, yet it addresses a fundamental need that exists regardless of political circumstances or government support. People and businesses will always need protection from pests, which makes the company’s business model largely independent of external influences and ensures steady demand over time.
A negative example that I personally witnessed was the solar industry in Europe during the 2010s. Many companies in this sector grew rapidly thanks to generous government subsidies and fixed feed-in tariffs that guaranteed attractive returns. When these subsidies were reduced or removed, most of those businesses collapsed almost overnight. Their success had relied more on political support than on competitiveness or innovation, which showed how fragile a business model can be when it depends too heavily on external incentives.
6. Low Capital Intensity and High Scalability
Scalability is one of the most decisive qualities of a strong business model. It determines how effectively a company can grow its revenue base without a proportional increase in costs or capital investment. A scalable model creates operational leverage, allowing profitability to rise as the business expands. Low capital intensity is a valuable complement to scalability, as it enables companies to reinvest profits efficiently and compound returns over time. Ideally, such a structure allows a business to replicate success across products, markets, or regions with minimal incremental effort, making growth more predictable and sustainable.
Examples of scalable and capital-efficient business models include Nemetschek and Celsius. Nemetschek develops software and sells it to millions of customers with minimal additional cost per user. Celsius, through its partnership with Pepsi, scales rapidly by leveraging Pepsi’s existing distribution network and bottlers instead of building its own infrastructure.
As a counterexample, many manufacturing businesses face natural limitations to scalability. For instance, a company that produces heavy industrial equipment must invest significant capital into each new unit and cannot easily scale production without adding plants, machinery, and labor. Growth therefore requires large incremental investments, making expansion slower and more resource-intensive compared to asset-light models like Adobe or Celsius.
Final Thoughts
The business model is one of the central and probably the most important aspects when analyzing a company. We have looked at several factors that can play a key role in evaluating a business model, but it is important to remember that these elements should always be viewed together and in context. Not every company needs to meet all of them to qualify as a quality business. In practice, there is rarely such a thing as a perfect company.
And this brings us back to the puzzle. At the end of the day, what matters is how the different fundamental pieces fit together to form a company that makes a successful long-term investment.
Both Nemetschek and Celsius are capital (Asset) Heavy Business Model.
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Total Assets (any type of assets) = Total Capital's (any types of capital)
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My Capital Very Light Business Model Criteria:
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Current Assets > Total Equity > Total Liabilities > Current Liabilities > Non-Current Assets > Non-Current Liabilities
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(1 + Gni) ÷ (1 + Gic) ≥ 1
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G = Growth
ni = net income
ic = invested capital
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You can check and compare the criterias on PDD, Nemetschek and Celsius.
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Capital light usually adds advantages in the profitability but not necessary.
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However, both capital light or heavy business model can also achieve high profitability if they are very efficient in operations.
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For example, Rollins is Capital Heavy Business Model with negative NCAVPS but still can achieve double digits ROA.
:: Circle of Competence ::
Boeing business is complex, so are Nvidia, Apple, NVR, ISRG, TSM, etc.
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Any businesses will boil down to and reflect in their financial performance in P/L, B/S and C/F statements.
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The actual Circle of Competence is about the Competence In The Last Mile Financial Statement and Intrinsic Value Evaluations.
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The Last Mile Financial Statement and Intrinsic Value Evaluations is the SIMPLICITY.
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Macroeconomy analysis is complex.
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Industries analysis is complex.
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All manufacturing and construction processes involved complicated engineering and sciences, in fact all business and their engineering and science processes are complex.
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Financial Analysis is Simple.