Q: What is a "business model"?
- L.D., Springfield, Mo.
A: Sorry, but it's not Warren Buffett in a suit on a runway. A business model is how a company makes its money. A typical silver company's business model, for example, involves exploring for silver and then extracting and selling it. But it doesn't have to work that way.
Silver Wheaton, a successful silver-focused company, makes much of its money by financing other silver companies - in exchange for the right to buy some of the silver they produce at favorable prices. That business model is far less capital-intensive, as it doesn't involve lots of mining labor and equipment. It reduces risk, too.
When evaluating a company, assess how attractive and profitable its business model is. Will it permit the firm to grow quickly and to fend off competition? Is it expensive to maintain?