The value of any asset is the net present value of its discounted cash flows. Before the investor can even begin to value a business, he has to know what is generating the cash. It is important to be specific and avoid making assumptions.
Take Coca-Cola, for example. Billions of people across the world are familiar with Coke’s products. When you see it on the shelf of your local grocery store, you may have concluded that it was the Coca-Cola Company that sold the bottled goods to the grocer. In reality, a look at the most recent 10K reveals that, although the company does sell some finished beverages, almost all of its revenue is derived from the sale of “beverage concentrates and syrups” to “bottling and canning operations, distributors, fountain wholesalers and some fountain retailers.” In other words, it sells the concentrate to bottlers, the largest being Coca-Cola Enterprises (a separately traded public company). These bottlers create the finished product, shipping it to your local store. It may seem like a small distinction seeing that Coke’s ultimate success depends upon the products sold in stores and restaurants; approached from another angle, however, and the investor can quickly surmise how vitally important the relationship between Coke and it’s bottlers is to the bottom line.
