Comments on: Understanding the True Profit Margin http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/ Value Investing Blog Mon, 16 May 2011 10:55:06 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: benQuest http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/#comment-3628 benQuest Mon, 16 May 2011 10:55:06 +0000 http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin#comment-3628 Thanks a lot for your enlightening post! Now, I don't wonder anymore why some famous establishments have this big inventory turns. Business success is on the way if you understand net profit, liquidity and turnover ratios. I found this here: <a title="The numbers you need for business achievement" href="http://personalmoneystore.com/moneyblog/2011/05/10/small-business-metrics/" rel="nofollow">Master the metrics of small business success</a>. Again thanks Joe! Thanks a lot for your enlightening post! Now, I don’t wonder anymore why some famous establishments have this big inventory turns. Business success is on the way if you understand net profit, liquidity and turnover ratios. I found this here: Master the metrics of small business success.

Again thanks Joe!

]]> By: Joe Ponzio http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/#comment-3246 Joe Ponzio Fri, 23 Apr 2010 05:57:21 +0000 http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin#comment-3246 100% agreed. That's why we shouldn't look at inventory turnover <em>or</em> profit margin, but the combined True Profit Margin. 100% agreed. That’s why we shouldn’t look at inventory turnover or profit margin, but the combined True Profit Margin.

]]> By: Eric T http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/#comment-3186 Eric T Sun, 07 Mar 2010 06:09:52 +0000 http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin#comment-3186 Instead of inventory turnover, I use the cash conversion cycle, or CCC. It is more accurate for companies that manufacture and distribute goods. It also includes accounts recievable. Companies can have high inventory turnover, but if it takes them a long time to manufacture the goods (if they both manufacture and distribute) and collect recievables, then the inventory turnover may not paint an accurate picture. CCC basically measures the amount of time it takes for one dollar thats invested into the business to go through all the steps to become one dollar (and some cents) profit. The cash conversion cycle is hard to find. You can calculate it yourself (investopedia has a few good articles on to do calculate it). I can only find it on one website that has it for you. <a href="http://ih.advfn.com/p.php?pid=financials&amp" title="http://ih.advfn.com/p.php?pid=financials&amp" target="blank" rel="nofollow">http://ih.advfn.com/p.php...</a>;cb=1267981127&symbol=ARDNA Go to the very bottom under "efficiency ratios" For this company, the CCC is 29, so about once a month a dollar invested becomes profit. Instead of inventory turnover, I use the cash conversion cycle, or CCC.

It is more accurate for companies that manufacture and distribute goods. It also includes accounts recievable. Companies can have high inventory turnover, but if it takes them a long time to manufacture the goods (if they both manufacture and distribute) and collect recievables, then the inventory turnover may not paint an accurate picture. CCC basically measures the amount of time it takes for one dollar thats invested into the business to go through all the steps to become one dollar (and some cents) profit.

The cash conversion cycle is hard to find. You can calculate it yourself (investopedia has a few good articles on to do calculate it). I can only find it on one website that has it for you.

http://ih.advfn.com/p.php…;cb=1267981127&symbol=ARDNA

Go to the very bottom under “efficiency ratios”

For this company, the CCC is 29, so about once a month a dollar invested becomes profit.

]]> By: sandesh trivedi http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/#comment-3184 sandesh trivedi Sat, 06 Mar 2010 23:46:20 +0000 http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin#comment-3184 Very well explained joe. i believe one must also take into account the nature of the product being manufactured while determining profitability. For a manufacturer of disposable needles and syringes its not difficult to maintain high inventory turnover and sales growth whereas for pc manufacturers or other capital intensive products like tractors, houses and cars it might be difficult to maintain high inventory turnover and also to grow their sales becoz their existing sales compete with their potential sales. Very well explained joe. i believe one must also take into account the nature of the product being manufactured while determining profitability. For a manufacturer of disposable needles and syringes its not difficult to maintain high inventory turnover and sales growth whereas for pc manufacturers or other capital intensive products like tractors, houses and cars it might be difficult to maintain high inventory turnover and also to grow their sales becoz their existing sales compete with their potential sales.

]]> By: Joe Ponzio http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/#comment-3040 Joe Ponzio Tue, 29 Sep 2009 09:09:22 +0000 http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin#comment-3040 Return on equity is much better than a straight comparison between the profits of two companies. A company that can generate high returns on equity is going to have a better chance of growing or providing better returns to shareholders than a company that has a hard time generating profits on its immense asset base. Return on equity is much better than a straight comparison between the profits of two companies. A company that can generate high returns on equity is going to have a better chance of growing or providing better returns to shareholders than a company that has a hard time generating profits on its immense asset base.

]]> By: Joie http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/#comment-3027 Joie Thu, 10 Sep 2009 20:05:58 +0000 http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin#comment-3027 Is that the reason it is better to take return on equity instead of taking the profit as it will mean how much additional dollar generated for each dollar invested ? Is that the reason it is better to take return on equity instead of taking the profit as it will mean how much additional dollar generated for each dollar invested ?

]]> By: Ashutosh Nigam http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/#comment-3019 Ashutosh Nigam Sat, 05 Sep 2009 07:54:18 +0000 http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin#comment-3019 Hi Joe, Exceptional Joe! It cleared so many of my questions about Inventory Turnover. Thanks, Ashutosh Hi Joe,

Exceptional Joe! It cleared so many of my questions about Inventory Turnover.

Thanks,

Ashutosh

]]> By: Joe Ponzio http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/#comment-3013 Joe Ponzio Thu, 03 Sep 2009 15:39:07 +0000 http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin#comment-3013 <b>david:</b> Hopefully getting off track helped provide a touch of sanity and clarity in an insane time! <b>simon:</b> It wouldn't automatically boast a higher ROA because the company might hold other assets weighing on that number. Inventory turns helps you see how effective the company is at turning dollars invested in inventory into extra profits, regardless of the rest of the business and its assets. In essence, inventory turns is another piece of the puzzle. In and of themselves, none of these numbers mean anything. Taken together, you can begin to find additional strengths and weaknesses in a business. <b>Jeff:</b> I don't hear that often: <i>That guy screaming 'F Wall Street' - he's elegant!</i> Thanks! david: Hopefully getting off track helped provide a touch of sanity and clarity in an insane time!

simon: It wouldn’t automatically boast a higher ROA because the company might hold other assets weighing on that number. Inventory turns helps you see how effective the company is at turning dollars invested in inventory into extra profits, regardless of the rest of the business and its assets. In essence, inventory turns is another piece of the puzzle. In and of themselves, none of these numbers mean anything. Taken together, you can begin to find additional strengths and weaknesses in a business.

Jeff: I don’t hear that often: That guy screaming ‘F Wall Street’ – he’s elegant! Thanks!

]]> By: Jeff http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/#comment-3011 Jeff Thu, 03 Sep 2009 06:01:58 +0000 http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin#comment-3011 simon, I think Joe was just breaking down those ROI formulas into their components to get closer to the answer to the question "Why?" As in, "why is Company A better than Company B?" You could just say "it has a higher ROC," or you can break down the ROC into its component parts (inventory turns, profit margin, leverage) and find out why that is so. Joe did that in a more elegant and thoughtful way. simon,

I think Joe was just breaking down those ROI formulas into their components to get closer to the answer to the question “Why?” As in, “why is Company A better than Company B?” You could just say “it has a higher ROC,” or you can break down the ROC into its component parts (inventory turns, profit margin, leverage) and find out why that is so. Joe did that in a more elegant and thoughtful way.

]]> By: simon http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin/#comment-3009 simon Tue, 01 Sep 2009 19:13:11 +0000 http://www.fwallstreet.com/article/189-understanding-the-true-profit-margin#comment-3009 Joe, You're essentially talking about the investment return ratios: ROA, ROE and ROIC to determine the quality of a business. Company A in your example is more asset-light than B, basically because at any given time it needs to hold less inventory which is part of it's assets. So it would boast a higher ROA, and ROIC for example. Whereas B is more capital intensive. So, why would you need to look at inventory turns additionally? Joe,

You’re essentially talking about the investment return ratios: ROA, ROE and ROIC to determine the quality of a business. Company A in your example is more asset-light than B, basically because at any given time it needs to hold less inventory which is part of it’s assets. So it would boast a higher ROA, and ROIC for example. Whereas B is more capital intensive.

So, why would you need to look at inventory turns additionally?

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