There are several underlying elements that make value investing so successful. Value investors cover all the respective elements no differently than how many people thoughtfully resolve problems. An holistic approach towards investing is utilized. This refers to to gaining an understanding of the respective industry and its members; i.e. understanding what makes the pool of investments work. Next, value investors identify key indicators of success and for comparison among the members of the pool of potential investments. Discovering why one member is so much more successful than others allows the value investor to gain perspective and use this to fully understand operations of all members of the pool of investments. With this knowledge, it is easy to develop a set of financial metrics that quantifies or ranks the respective members in the pool. This ranking is essential with establishing the respective buy/sell points. Finally, each member’s intrinsic value quantifies the overall desirability of the respective company. Now it is merely a process of enacting the model and allowing the model to do its job.
Units of Production
Units of production is a form of depreciation that is most often slightly accelerated in form. It is used in manufacturing whereby the life of the asset is based on its engineered value of units it is expected to produce. Each year, the depreciation formula is the actual number of units produced divided by the total expected times the asset’s purchase value.
‘Fixed costs’ is a business term used mostly in cost accounting. It has several meanings based on its usage. The most common definition associated with fixed costs is expenses that must be paid regardless of production or sales volume. The best example is rent for a company. It doesn’t matter whether you produce or sell one widget or several thousand, the rent must still be paid.
So why is it important to understand fixed costs? How is it used in cost accounting and in financial reporting? Finally, what are examples of fixed costs?
When it comes to depreciation, no two businesses are alike. Unlike traditional straight line depreciation where the asset value is costed out to depreciation expense in equal increments over a given life expectancy, accelerated depreciation expenses the cost at higher values during the earlier accounting periods and at a lower amount towards the last half of the asset’s life expectancy.