Investing Lesson: Value Drivers

Patrick Badolato is an associate professor of instruction at the University of Texas at Austin McCombs School of Business. Motley Fool host Ricky Mulvey caught up with Badolato for an "investing classroom" session.

They discuss:

• Different drivers of business value.
• What growth rates ignore.
• And the thing that Sweetgreen misses about automation.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 04, 2023.

Patrick Badolato: The higher that CAGR. It just might be that in that short period of time or that unique setting, the growth rate was amazing. But our question with valuation is not what did they do. Obviously, they have to do something first and foremost, so I'm not discrediting it completely. But look at it, take it in, but don't just assume that because there was this high growth rate, which again, could have been driven by a low base or a low starting point. It must continue.

Mary Long: I'm Mary Long, and that's Patrick Badolato, an Associate Professor of Instruction at the University of Texas at Austin McCombs School of Business, and returning guest to Motley Fool Money. Ricky Mulvey caught up with Badolato to talk about how investors can better understand drivers of value. They discuss how to weigh intangibles, spotting trends versus forever changes, and what's missing from commonly used financial metrics.

Ricky Mulvey: The focus of today is how investors can understand drivers of value for a business. We're going to explore some ways for folks to think about them. But you're an accounting professor and many put valuation firmly in the silo of finance, so what is the role of accounting in this discussion on company's value?

Patrick Badolato: Great, Ricky, I'd love to answer that question. When we talk about valuation, we're pretty much inclined to talk about things like DCFs, discounted cash flow evaluation models, you talking about cash flows and all that absolutely fits. But I would argue there's still a layer where accounting is really essential, which is OK, what drove that value. That's going to be a conversation around a company's ability to generate revenue, grow that revenue, and then create and maintain operating profitability. Which is really a conversation where a knowledge of accounting and a knowledge of those pieces is absolutely essential in making sure that we understand, OK, how does that happen? Ultimately, what enables those cash flows to be created? Are you a business that can generate revenue and have your expenses less than that revenue over time?

Ricky Mulvey: When you look at these, some of the way that we can think about this with valuation, there's a lot of ways to think about it. One is looking at the free cash flow, which is just the cash coming out of the business at the end of absolutely everything. You could look at earnings before interest and taxes. You could look at net income. What should be the focal point for investors looking at this to start the conversation?

Patrick Badolato: Good, in some ways, I almost want to push back a little bit and say it's less about how we end that, how we count it, what's our ultimate way of doing the scorekeeping, but more about the process of getting there. I'm going to throw in a quote from Kobe Bryant which is, "Don't copy what I did, but copy how I did it." I think that it's the how that you determine those free cash flows or EBID or whatever, it ends up really being net income, it still gets down to how you do it. To elaborate on my earlier comment was that if you look at revenue, what is revenue? It's your ability as a company to create value for your customers. Value that they see that they're going to pay you for. Then what is the idea of achieving or maintaining operating profitability? What can you do? Can you create that revenue in a cost efficient manner? If you can do that period after period after period, that's your core business, so that's more about how you do that than what does it end up in.

But to use another quote, I guess this will be from Bill Walsh, it's like the score takes care of itself if you're doing that. If you're consistently generating revenue and controlling your cost and generating operating profitability, that's going to translate to profits, and most importantly, that's going to directly translate to your free cash flows. It's not a conversation of I'm only looking at income or I'm only looking at cash flows, but really how the business is run in a sense that enables you to have revenue, achieve operating profitability, and then ultimately translate those business activities to cash flows. I don't think there really are shortcuts there, but if you're able to do that over time, that's your ability to drive value and create value as a company. A discounted cash flow valuation model, intrinsic model, when we talk about valuation, that's a dense subject. The approaches to that as we see in the classroom or we can see really everywhere can get pretty complex. You got a bunch of adjustments, complex treatments it's not easy. I try to remind my students really at all levels because I think the background knowledge coming in, definitely has an opportunity to emphasize it, let's focus on how the business is run. But before we get into those adjustments, before we get bogged down with some of the complexities of valuation models, it just make sure like, can we create value for our customers and can we do so in a cost efficient way? Those core ideas of revenues and expenses are still what's going to translate to our cash flows, the creation of value over time.

Ricky Mulvey: We were trading emails before this, and part of it was about the Oswald [inaudible] latest video about his valuation of Birkenstock, and there's an early part of it where he takes some shots at accountants like you. I shouldn't say accountants like you, I should say all accountants. He's taking shots at the accounting profession. But then he goes back and there's a little bit of love for the accountants, especially when he's talking about those intangibles, something like brand recognition, moats, and the point is, is that those should all show up in terms of revenue and margin. Let's say you have a brand for a shoe. If you have a brand, then you should have a higher operating margin than your competitors.

Patrick Badolato: Ricky, I agree. We discussed that and I was able to work through it and some of the beginning part was a little harder to work through, but I love the part that he got into right around 18 minutes, 49 seconds, which is just coming out directly and stating that, hey, the company value is about, are you able to drive your revenue and are you able to improve margins or charge more? I think Birkenstocks is a great example to talk about that. What's their potential in terms of being able to charge more, get greater visibility? I think [inaudible] did a great job of fleshing out all those things, its just a conversation evaluation which is, hey, what about revenue and operating expenses? If you can do those things and do those things well, if you have that brand that resonates, if you have the ability to use different individuals to promote your sales, to charge more, even in the face of direct competition, that itself is the business creating value. I appreciated that as he got into the application of valuation of Birkenstock, it was a good reminder of that in actions the approach he's taken to evaluation is very much. Accounting information as expressed through revenues, I guess, more importantly the drivers of revenue, and then operating profitability, or more specifically, the how of operating profitability, what specifically enables Birkenstock to have higher margins. That is a wonderful intersection of how accounting and finance, and valuation and all these other subject matters ultimately come together. Stepping outside of our silos that we can sometimes get caught up in academia, but realizing it's a comprehensive assessment of the business, and so I thought that the application of Birkenstock was awesome.

Ricky Mulvey: One way that some investors, and I'm guilty of this myself, we like to look for a sustainable long-term revenue driver, or like a long term competitive advantage, is by really focusing on the compound annual growth rate of revenue. Simply how quickly is this business growing revenue year by year? How should investors take this information and use that to make that decision?

Patrick Badolato: Another great question, as my students would know, I love to talk about in class. I'm going to maybe take a stance that most don't take, but I really try to emphasize and push back on a compound annual growth rate, or as many of us call it a CAGR, because it definitely shows us the what, how did we grow from a small amount to a big amount? But I push back on a little bit because one, it's greatly affected by your starting point, your end point, so you start small like virtually every start up. Almost every start up just mathematically is going to have a high CAGR. My pushback on a CAGR is that just tells us what, back to that be Kobe Bryant quote, which I absolutely love. That's just telling us the what and it's not really telling us the how and in many ways the higher that CAGR it just might be, in that short period of time or that unique setting, the growth rate was amazing. But our question with valuation is not what did they do. Obviously, they have to do something first and foremost so I'm not discrediting it completely but look at it, take it in, but don't just assume that because there was this high growth rate, which again, could have been driven by a low base or a low starting point, it must continue. If I can jump in with an example here, and talking about this the last couple of years in the classroom but with COVID we had a negative economic shock that made it even more interesting to look at so many different companies. And one of the things we saw with companies was like the pull forward of demand. COVID was Peloton such a great classic case like they did phenomenally well during COVID because competition was crushed. We were spending more time at home.

Disposable income was shifted toward home-related purchases. We still wanted community and fitness and stuff like that, but they are connected. Fitness hardware just absolutely skyrocketed the CAGR on that is, I don't know off the top of my head but amazing. But the challenge is like the bigger that was, it was almost like the harder it was going to fall and so we can't value that continued performance. We have to think about well, if that marginal person, bought the bike or the treadmill, whatever else, they would have probably bought it without COVID in six months or two months or something later but like we pulled forward that demand. They're just a really great lesson I think we can all learn from of why just the what of the revenue performance isn't good enough to figure out to determine exactly what comes next. A simpler example of that, I think, Target really struggled to a certain extent and especially in the summer issue of 2022 with its home goods where the same thing like we bought more patio furniture and stuff like that and it's just harder for them to keep that up. Now for them, it's just a segment of their business but a meaningful one. But it's like we have to think about, hey, what drove the growth? That's so much more important, what drove it will continue than just whether or not mathematically it was a high rate of growth over a certain period.

Ricky Mulvey: Yeah, and I think there's also an important narrative component to especially the Peloton example where at the same time all of the gym stocks were getting essentially crushed, like no one would ever go back to the gym. So you had essentially a story that the market was telling, which is everyone will be working out at their home forever and things have completely changed, and for me is I've been now a stock investor for a few years now, that's something that I'm trying to be more keenly aware of is one, is the market saying that something has changed forever.

Patrick Badolato: Yeah, that's an awesome question. It's just never going to be easy to answer and I had a student who actually, said this, I want to share this but like was finishing a conversation around Peloton and someone said along the lines of like, is this just the next shake weight. Some of our listeners might know what that is or not but everybody can look it up. It just was crazy in that. It's like yeah, but the fitness industry itself broadly defined, seems like, looking back at least with hindsight bias like one that's constantly shaped by fads and so I think that's what we're all after. Is this going to keep going? Is a phenomenal stick around or is it just a unique circumstances for the times? I think a challenge with Peloton and more broadly the fitness industry is that we're humans, we're pretty fickle with that stuff. So it might be one where that sustainable competitive advantage might just be a challenge to pull off. Although to their credit, I think the community and the classes and that stuff that may give them the staying power. Not necessarily the hardware component of it but the subscription component of what they add it and the convenience that offers for somebody. I think less so the COVID aspect but isn't more convenient to do some of that stuff at home than going to the gym or whatever else.

Ricky Mulvey: Yeah, I'd say there's sort of two things are going to change forever because of these developments for some businesses. One would probably be the weight loss drugs and you're seeing that with a lot of consumer packaged goods stocks like Hershey's been hit. Even companies, the medical device company, Dexcom, is people are able to lower their blood sugar from these drugs, maybe they won't need devices so much. Then the second story is artificial intelligence. There's been the positive side of it with a company like Nvidia, which is the leader in the chips for this but then there are some losers and one of them might be a company called Chegg, which Patrick to put it kindly offers homework help for students and the big question for them is, is this service needed when maybe a student can just ask, let's say I'm in your class, "Hey, what are the adjustments that I need to look for in Walmart's revenue in order to pass this test or this homework assignment that he's given me?" And maybe I don't need to ask that to a separate human on a website.

Patrick Badolato: Yeah, great application of this. I'm not the expert in AI but I think it's a good one. I was just having this conversation with my students about Chegg, and interestingly, they were all telling me about their friends and roommates who had used Chegg, but I knew no one had themselves used it in just a joking manner. Some of them did admit it but it was just interesting that it's convenient. It offers a shortcut for those looking for shortcuts and I agree with the sentiments you expressed, which is that's our big challenge. Is it sustainable in that couldn't there always be the next disruption? AI certainly may present that. I think in the short term and as my students anecdotally surveying them we're saying is that yeah, but it's still ready to go with their needs now and so I think the AI things a massive long run threat, but it may take a little bit of time for that to play out, only because my students specifically were stressing that for any of your more common questions that are used in test banks across the nation, like Chegg is basically really good at answering it.

The pushback too though is that like, hey, but for MBA-related things or any more of the involved applications. I think that we try to do in our class analysis and synthesis, not just answering questions. It just doesn't have that repository and what I'm curious is, will AI be able to solve both obviously the simple ones? Effectively come up with the solutions for all the big textbooks but also be more nimble in terms of answering your more unique or uniquely curated questions. Yeah, I think Chegg, it took a hit but I think the challenge we have there is the long-run sustainability of its business model. It's a shortcut in academia but is it too focused on just academia and the big challenge it faces with AI is, in the long run, its competitors aren't going to be Course Hero and Quizlet and that kind of stuff. But the behemoths, they may not be as specialized as Chegg but they're still going to be there, potentially creating dynamic AI applications that as I say, do both the basic stuff and the more nimble or curated stuff.

Ricky Mulvey: So let's move on to a product then that you love, which has been a sustainable long-term revenue driver for Costco and it is a grocery store, a retailer that is unlike the others, primarily because it has a membership program. We talked about this a few weeks ago with Bill Mann about how that affects the company's valuation. But let's focus on the membership program as a value driver for Costco.

Patrick Badolato: Great, Ricky, and full disclosure as a shareholder of Costco and a longtime member, I'm biased here. This company I could just gush about and I have in front of many audiences. I'm sure the six listeners that I may have brought onto this are groaning right now, but I could keep going on. A lot of times people will talk about Costco, the membership program, and talk about the correlation of the membership program and the profitability. That's there. But I want to add a little bit of a layer to it. Talk a little bit more about the how, what they offer. I truly think that Costco has created an incredible sustainable competitive advantage. What's fascinating about what they've done is they've done it by focusing on driving revenue and simultaneously keeping their bottom line profits at a very low margin, 2-3%.

Actually, those go hand in hand. The membership is less. I want to argue less about just the profitability that it brings, but more about how do you get that. I want to argue a relationship with the customer. Where does that relationship start? Well, it starts with the membership, but then as you have that membership and then some cost fallacy works to their advantage. I paid for the membership, I got to get my money's worth. You start showing up to Costco and you start enjoying the treasure hunt and stuff that Bill Mann and you talked about which was awesome conversation a couple of weeks ago. You enjoy that and they have some unique things that can market pretty well. But I want to add another layer to it, is you're getting something else that Costco offers that most places don't, which is that they have curated the product selection. They're only offering one or two shopkeeping units, or three or four whatever else. But in many ways, we can trust that they're likely the three or four best possible ones. Because the person whose job it is at Costco to find those like they spent so much time in research, and more importantly, Costco is economically on the hook. If they were to stock two different items and one of them was terrible, that's a huge loss to them. Where if another company is stocking 45 different types of peanut butter or detergent, whatever else you lose one that doesn't have the same impact.

They're all in on the product categories. In addition to that though, that also means that they're almost surely going to be the biggest buyer like even bigger than a Walmart, not in terms of the total amount. Walmart's another really well run company that's not in any way a knock, but take it a successful story like that, and even bigger than a Walmart in terms of that product category, because they're only buying one or two. If Walmart is buying more, the relative pricing power that Costco is going to have over the supplier is going to be significantly greater. What does that translate to? The consumers walking in, getting a curated set of goods at arguably the best possible price. As you see that period after period, or shopping trip, after shopping trip. Ultimately, what should that do? Well, that should translate to saying I appreciate the value that Costco is bringing to me and I'm going to give back to a certain extent, I use the word relationship, I want to keep that going here. I'm going to give back by giving them more share of my wallet. I might start at $164 each trip, whatever it is, but that's going to creep up and that's going to increase the ticket size or the frequency of the trips. On that, I would say what's really fascinating is they're able to generate value because they can do so at the store level.

You guys constantly, I love these conversations, talk about a good capital allocation, capital allocator. Sorry, capital allocation, the same thing. I think Costco is phenomenal at that because what it's doing is it's realizing that once the store is in place, we can generate incremental revenue growth. Not by adding new stores, which is a whole another incremental unit of capital, but by getting the customers at that store to both stay extremely high membership retention. But then, share of wallet spend more. They have an awesome graphic and I'm a big fan of footnotes of you and I have talked about before. But if you want to check out a footnote, it's pretty cool to see. I forget the page, I apologize for that. But in their 10K, they've got a graphic in the beginning somewhere. But it just shows the millions of dollars of revenue per store. But they hold the store base constant. They're not saying, here's our total sales, which could be juiced by adding more stores.

They're getting into, look, if you just hold one store constant, I'm going to use a representative store, and the number is actually 164. If you hold one store constant in 2014, that store is generating 164 million. But let me say $164 for a Costco trip. But then by 2023, that's $268. That's a huge ability to generate more revenue. Importantly, without adding any stores, without adding any more capital to the equation. Ultimately, what does that do? The amount of their ability to give a great value proposition to the customer translates to us buying more from them, but us buying more from them means that on a per store basis, they're generating more revenue. Keep those margins constant, which is part of the equation, we know we're getting the lowest price there. Keep the margins constant. What happens there? Then each store is actually generating more profitability. Costco, the corporate company is creating value for shareholders by focusing on its obsession with creating value for its customers.

Ricky Mulvey: You've looked into this a little more than me, but my understanding was that, Costco breaks out the membership fee on their income statement. The reason they did that essentially is like, it's great that folks are spending more there, but pretty much one going into a Costco basically breaks even. All of their margin is going to come from the membership fee, and that's why there's so much Wall Street pressure on it, and every single time Krygelinic just retired. But there's Costco leadership on a call, they say, ''Hey, when are you going to boost that?'' That's why Wall Street cares about it so much.

Patrick Badolato: Yeah. I think it's there, it's reported. An opinion I have is like they're just reporting it to remind us of the fact that, ''Hey, we basically sell you stuff at virtually a break even amount.'' The other way to think about it is like why would you report that? Is like the customer is looking at that and I'm not saying most customers look at the footnotes or the financial statements, but it's like the other reminder of that is like we're operating a roughly break even store where a little bit of GNA and overhead, stuff like that. But we're selling you a good, we're selling you for just what it costs us to get it ready for you to buy and nothing more. I think that's almost part of the long-run relationship here is that this isn't, they're not trying to price gouge or run gimmicks. It's what's the best thing to do here is keep the membership around for years. Give them the highest quality, the most amount of value per price spent, and then they'll keep coming back. I think the membership is a critical part of it, but I think the way I always look at the membership conversation is, it's a part of this whole equation, but it's much more about a relationship with the customer who's going to spend more and Costco reciprocating on that relationship by showing and do it and following through and let's keep prices the low as possible. The supplier part of that, the product curation part of that, all those other aspects as well.

Ricky Mulvey: We've gone from revenue, let's now go to operating margins because there's a company that has a lot of questions surrounding them and that is SweetGreen, the chain of restaurants that's big on salads. They also serve other things like a Miso glazed salmon, which might not be as good for you as a slice of Costco pizza. That's a conversation for another time. However, they have found an interesting way where they have started to expand their margins by offering what's called an infinite kitchen. Basically, you have a few folks working with the customer experience side. But we can make salad with these tubes of ingredients where the salad rolls through and then a row bottle mix it up. There might be a better explanation for that, but the big question is, does this meaningfully improve the company's path to profitability because right now it does operate at an operating loss is a restaurant chain?

Patrick Badolato: Yeah. Let me back up for a second, just to add one thing in, we've discussed this in class. I think just empathetically, it's going to give SweetGreen a chance here. The initial idea is like the Chipotle of salads, but it's way harder to do this in salads because Chipotle's main ingredients, rice and beans, are universally available, extremely cheap, great shelf life, etc before they're cooked, they're starting with a base. If you look at a burrito of like effectively, very low-cost ingredients, and then it's just adding on a little bit of frills on top of that. But SweetGreen has just that perishability, the cost of their core stuff. The bigger challenge in the space. One of the things that I think we're talking about broadly across the restaurant industry, we've tried to weave into a couple of classes, is what's the role of automation in things? Is this one that's going to change what food prep, which might be a relatively simpler task compared to some other things. I'm curious about this. If I can just refer to their Q2 July 27 conference call, they got into this conversation and they basically were saying they have one of these, and the second one is supposed to roll off by the end of this year, I believe.

But is that the comment they made here? I'm going to read this because I think it might be easier. The restaurant level margin for the Naperville, the Infinite Kitchen location in June was 26% significantly higher than any new restaurant opening in this first month. As restaurant continues to ramp, we see additional opportunities to significantly improve the margin. In that conference call, they're talking about improved margins, restaurant-level margins in the Infinite Kitchen location. First, this is a conversation now we're getting into about operating profitability. That seems to bode really well. Is that the value unlock the solution for? I really want to push back on this. It's actually related to our first time you have me as a guest conversation we were having with Rent the Runway, which is issue here is that we don't know. We don't know because there are Sweetgreens excluding the depreciation from the restaurant-level margins. The specific problem with that is that this is more automation, but more automation means more cost of using machines.

Naturally, I would argue the result of this, and I was a little surprised that no analysts really pushed back on this call when I wasn't listening to it live, but reading Q&A after it occurred, is that what they really express is more of the result of math, which is that as you have more machines and less humans, if you exclude the cost of using those machines, your margin that excludes the cost of using machines is mathematically going to look higher. They said they had one third less workers, and they directly said that. I would say that you one third less workers I expect that your margin will be higher. But what do we need to see here? I'm curious if they'll move toward, because will they be able to show us the full depiction of the operating profitability? What we're going to need here is for them to include the depreciation of these machines, the cost of running these machines as one of those core recurring operating expenses. I know we have lots of metrics that ignore depreciation, none of which I'm a big fan of. Because I want to look at what is your core operating profitability? Which in the world of automation is going to have to include the cost of using those machines, or as we refer to it, depreciation expense. I would love for them to give some flavor into what are the operating profitability if you include the cost of the machines because naturally with more machines, if you exclude the cost of machines, the profitability is going up. But I just don't think that's diagnostic yet. I'd love to see on a more apples to apples basis here.

Ricky Mulvey: The accounting argument for this is that they implemented what one would assume are these very expensive machines that have a certain life expectancy and that there's a cost that they implement for each year that these machines exist, eventually as they go down to zero. But now when they're putting out their income statement, they're able to say, you know what? We're going to push that cost to the side and say, look at how much we've made up for with the costs we've saved on labor.

Patrick Badolato: We're going to think you laid that out really well. You can't from a US GAAP standpoint, ignore something like depreciation. But lots of companies use a bunch of different non-GAAP metrics, which is totally legal and sometimes actually value enhancing where they're saying look at this. Not that there's always the required stuff that's there, but it's shifting the perspective. It's never a situation where I'm not in any way saying they're not reporting correctly. They are but they're saying look at our restaurant level margins. In the conference call, let's talk about our restaurant level margins. But what's missing is that the restaurant level margins are not including all the expenses of running a restaurant. Before this, you and I were chatting about what they were doing with general administrative.

I would say I'm OK with evaluating a restaurant level profitability and setting aside the corporate general and administrative expense. Not because it'll never matter, but if the increment of growth or the increment of profitability really here is, can you have a positive contribution margin? Can you generate profits to be restaurant? If so, as you grow restaurants, then you should be able to hip break even cover your general administrative expenses and then return or generate some overall profitability for the investors or for the total company. But excluding general administrative from a restaurant level margin makes sense as a step in the process of figuring out what they're doing. But excluding the restaurant level cost of using the machines is just harder to stomach because it's a core recurring operating expense for them and one that's only going to become increasingly important for everyone really as the world moves toward automation in different ways.

Ricky Mulvey: The other one that might raise some questions for investors is that they also add back in the pre-opening costs. When a company is opening a relatively like they're in growth mode, they're trying to open more restaurants one could say that maybe this isn't a one time expense for these restaurant margins.

Patrick Badolato: Another good lens there of like how do we associate when companies tell us that something is one time or ask us to ignore it? It's a good broad conversation. We don't necessarily have to take their word for it. If it truly is one time that's fine. But I think Sweetgreen's a good example where, look pre opening expenses, they're saying they're in growth mode and maybe they should be in growth mode. But if that's the case, then that's going to be a recurring expense for the long foreseeable future. I can add one more thing in there as they continue to grow. Just a caution I have with Sweetgreen is you're assuming this is one where I think we can learn from what happened to Whole Foods a couple of years ago. Their first locations did amazingly well. Their margins and their growth, and their comparable store growth, the metric that Costco succeeds on, are really great. But at one point, I think they just ran out of those ideal locations and they started putting stores arguably, maybe too close to stores. Here in Austin, Texas, we have a little bit of that with Whole Foods, or they just had to go to less optimal locations. I'm not saying they're bad locations, but they're not as good as the initial ones. You have that challenge to operating profitability as you keep growing, which is that. If your first 400 locations are like the best ones where the brand resonates. Let me bring back in the conversation about with valuation the brand resonates. You've got the ability to have good margins. You can get all those other things working for you, but it's likely that you're going to potentially run out of them at some point. If you run out of them, you're going to have to expect that you could have a lower margin on a restaurant basis as a per unit basis going forward. Location choice is one I want to go back to our conversation about CAGRs where I don't want to just assume that because they had profitability at this amount at their optimal locations, as you move out and add more locations, that profitability will be maintained.

Ricky Mulvey: As we wrap up with this conversation we like looking at the top line revenue and expenses, but those aren't the only factors for determining earnings quality. Some folks, including myself, I've been guilty of just checking out that free cash flow line. Sometimes this can work and sometimes it can't. First, let's talk about the times that this can work.

Patrick Badolato: One I would say, and I'm a big part of this in class all the time, it's not a earnings versus cash flow arguing, you don't have to choose the side. I think sometimes we do that and we make a mistake. It's used both. The orient ourselves with the idea of like, I should expect them to work together, now, they won't be the same either in like a bookkeeping, transactional sense or even for an annual year. Don't expect them to be the same. But I would say over time, you should expect. It's a red flag if your earnings are moving in one direction and your free cash flow are moving in a different direction for a repeated period of time, not for one year or whatever else, but figure out what's going on there. They should trend together. If you have increased what's your primary driver of free cash flow is? Back to the beginning it's your ability to generate revenue greater than your expenses over time. At any moment in time no, there's going to be exceptions to that, but you want them to work together. It's say yeah, look at both, look at how and the why of revenue. Look at the how and why and the free cash flows. If you have profitability and no free cash flows, I'm worried about that. If you have free cash flows and no profitability, I'm also worried about that. That's the first way of looking at, it's like just use them together. There's no side we have to take here, multiple financial statements, multiple financial metrics for a reason. I don't never want to make a decision where I'm ignoring information that's out there.

Mary Long: Do you have ideas about topics for our next Fool school session? We want to know. You can always reach us at podcast at Fool.com but we're also getting more active on Motley Fool member boards. Ricky's got a thread on community.fool.com where he's chatting with listeners and sourcing ideas about guests and topics for future classroom episodes. Head on over and let us know what you want to know. Community.fool.com. I'll leave a link in the show notes. See you there. As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.