Business cycle

The recurring pattern of expansion and contraction in economic activity, driven by swings in credit, investment and inventory.

Its relevance to company analysis is that operating leverage amplifies it. A business with high fixed costs sees its profit swing several times as far as its revenue, which is why cyclical earnings should never be capitalised at a normal multiple.

Sectors also lead and lag. Financials and consumer discretionary turn early; capital goods and infrastructure turn late.

Know where the earnings sit in the cycle before valuing them.