What Am I Missing? The Sixth Question Most Investors Forget

You've checked growth, profit, debt and price. The numbers look fine. So what could you be missing? Usually, what the numbers depend on.

Numbers show what happened, not what holds them up

A company's results can look smooth for years and still rest on something fragile: one supplier for a key part, one customer buying a large share of everything, one product doing most of the work. None of that shows up in a growth rate or a margin — until it changes.

Dependencies

Many companies rely on outside partners: a manufacturer who builds their products, a cloud or network provider, a licence for a key technology. Ask: if this partner raised prices, had a problem, or walked away, how much would it hurt?

Concentration

When a few customers make up a large share of sales, each one has a lot of bargaining power — and losing one can move the whole company. The same goes for sales concentrated in one country, or in one product line.

Where to find it

U.S. public companies have to describe significant risks and dependencies in their annual reports (the 10-K), especially in the “Risk Factors” section and the notes on major customers. It's long reading. That's why Sixth Element's sixth question — What am I missing? — restates what a company says about itself, with a link to the exact filing, instead of guessing.

An example: two parts suppliers

Two invented companies each sell $100 million of parts a year with the same healthy margins. Company A sells to hundreds of customers; its biggest is 5% of sales. Company B's biggest customer buys 60%. On the usual numbers they look the same. Underneath, one of them could lose more than half its sales with a single phone call.

The numbers tell you how well the business has done. The dependencies tell you what it would take for that to change.