Author: Mike Byrne
Date: 19:03:01 04/08/03
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On April 08, 2003 at 18:11:52, Bernardo Wesler wrote: >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. Let me guess , you're taking a mico economics course. I hope you get an "A".
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