[lbo-talk] corporate profits?

Mike Beggs mikejbeggs at gmail.com
Thu Dec 17 14:51:31 PST 2009


On Fri, Dec 18, 2009 at 9:07 AM, shag carpet bomb <shag at cleandraws.com> wrote:
> if a company earns 900 million in revenue with 90 million or so profit, the
> rest expenses and taxes, what is that called?
>
> poking around, i get the impression it's not called a profit rate or a
> profit margin. could be misunderstanding, though.
>
> and in any event, i seem to recall doug posting something here indicating
> that the typical large, public corporation had about 1-2% profits --
> whatever that meant, actually. Is that correct?

To get a profit rate you need something for the denominator - not the revenue but the amount invested. Which can be defined in a number of ways. The simplest accounting definition is the rate of return on equity - basically you divide the profit figure by the book value of the company's assets minus liabilities other than equity. Theoretically, the profit rate is the value of profit over some time period divided by the value tied up in generating it. 'Tied up' is pretty vague, which you could define in different ways depending on what you are using it for, or what information is available. But you use 'tied up' rather than 'cost' because certain elements of cost circulate faster than others - e.g., if the company pays wages every week and gets back the same funds every week as part of revenue, on an annual basis only the weekly cost of wages is 'tied up', the same funds cycling in and out through the books week by week. For that reason theoretical treatments of the profit rate often just use the value of fixed capital (machinery etc) as the denominator.

Cheers, Mike



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