Author: Bernardo Wesler
Date: 15:11:52 04/08/03
Any company or kind of commercial activity should live to achieve a certain level of profitability. If we took the long term, that level of profitability should be higher than the profitability achieved by putting the company’s money in a “non risk” investment, such as a fix account in a world’s leading bank. It is very common to confuse terms such as invoiced, income and profitability. Invoiced in a company, a store, is no more than what comes in through the sale of products and/or services. Thus, a company can have a great income but not be profitable at all. Income is the result of all the money that comes in minus all the money that goes out. Let us see an example and say I propose some business to you: Say a chess soft company that had an income of US$300,000; it is worth and offered to me for US$600,000. On the other hand I am offered to buy another chess soft company, from the competition, whose income was US$500,000, and that is worth US$1,500,000. Which one would you buy if you had US$1,500,000? In order to decide, we should think in terms of profitability which is the income mentioned, divided into the assets, or the equity (assets minus liabilities) or the effort made to achieve that income. If in the above example, achieving that 300,000 income implied immobilizing goods and resources for US$600,000, profitability was: P = 100,000 / 200,000 = 0.50 (50% per year) If for the second case we need more staff and resources, and immobilizing US$1,500,000, the profitability of this business was: P = 500,000 / 1,500,000 = 0.33 (33% per year) Then, these figures mean that, in order to measure a business, we have to think in terms of profitability and not income.
This page took 0 seconds to execute
Last modified: Thu, 15 Apr 21 08:11:13 -0700
Current Computer Chess Club Forums at Talkchess. This site by Sean Mintz.