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Operating Margins

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Re: Operating Margins

#121

Post by quietbritishjim »

Swenrekcah wrote: post #119
takinola wrote: post #101

Earlier quoted context omitted.

The Mafia makes (made?) a ton of profit but are a net negative on society. The better heuristic may be to consider what would be lost if the industry did not exist. Anything beyond subsistence agriculture would probably be impossible without financialization. There's a reason you had banks even in the middle ages when the average person was poor.

I agree that banks and many financial instruments are valuable and do facilitate value creation in the world. But that is the extent of it, they facilitate others to create value but do not make any on their own. They are however very well positioned to extract the profit from other industries and that is why the financial world can be so lucrative. Also, even if some financialization is beneficial that does not mean…

That's like saying that, when you farm wheat, the wheat plant did the value creation and the farmer just facilitated it.

Facilitating value creation is value creation.

Re: Operating Margins

#122

Post by mohon »

James_K wrote: post #107
takinola wrote: post #90

Earlier quoted context omitted.

> Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth. OK, I'll bite. This is a very ungenerous take. Entities that aggregate and provide capital create enormous real human value. In fact…

Banks do not provide capital. When I buy 50 tons of steel, no bank has sold it to me. The smelters and miners have provided that capital. Banks allocate capital. It is management, not provision. With that in mind, there are two types of productive financial work: actuarial services and accounting. Actuaries act as the managers of society's resources, ensuring that net profit is made and risk well distributed, and acc…

> History is clear on this: if left to their own devices, speculators will destroy the economy

Are you talking about the 2008 financial crisis? or do you mean something else?

Re: Operating Margins

#123

Post by purplepatrick »

nostrademons wrote: post #88

So this article is conflating the 3 different types of margins [1], and that's at least partially responsible for the results it gets. It talks about operating margins, but the definition that it gives is actually the definition for net margins, net income / revenue. Operating margins uses operating income, which excludes interest, taxes, and capital expenses. There's also gross margins, which are basically the value…

Thank you! I was just about to rant about this and decided to scroll to see if anyone had already called this out.

The article is quite embarrassing - it’s ok if you don’t know how P&L statement and balance sheet work, but writing an entire blog post without ever feeling the need to verify basic terminology is either very lazy or very ignorant…

Re: Operating Margins

#124

Post by James_K »

mohon wrote: post #122
James_K wrote: post #107

Earlier quoted context omitted.

Banks do not provide capital. When I buy 50 tons of steel, no bank has sold it to me. The smelters and miners have provided that capital. Banks allocate capital. It is management, not provision. With that in mind, there are two types of productive financial work: actuarial services and accounting. Actuaries act as the managers of society's resources, ensuring that net profit is made and risk well distributed, and acc…

> History is clear on this: if left to their own devices, speculators will destroy the economy Are you talking about the 2008 financial crisis? or do you mean something else?

History is filled with bubbles and crashes. At this very moment, there are trillions of dollars invested into companies with no clear profit model who are openly and obviously fraudulent in their accounting practises. Do you think this allocation is driven by a rational consideration of the risks of investing in a business with massive obligations and no possible way to service them? Or take bit coins. They are fictional products with clear negative value, and yet some financial professional push to integrate this funny money into the real economy.

Compare and contrast: resource allocation in finance-heavy Western nations with the same in the finance-light China. It's abundantly obvious to me that, through suppressing their financial sector, China has reached a superior economic outcome than they otherwise might have. We have elected to make traders the managers of our economy, and I think they have done a clear bad job and that we aught to reassess treating their decisions with such primacy.

Re: Operating Margins

#125

Post by baxtr »

cs702 wrote: post #120
itake wrote: post #95

Earlier quoted context omitted.

Isnt thay accounted for in the revenue - profit equation? The cost of capital is expressed in their balance sheet as expenses or depreciation. Pay back loans, investors, etc are all considered when calculating profit.

The amount of capital tied up in fixed assets is only one component of the capital required. Many other short-term and long-term assets can be components. Every business is different. For example, a consulting firm may have almost no fixed assets, but let's say its customers are mostly large corps that take 90-120 days to pay invoices. When the firm gets hired for a new project it must cover its expenses for 90-120 d…

Thanks for that.

So in other words: something like amazon is not a good business for Buffet since they have to finance the inventory for a couple of month at least?

Re: Operating Margins

#126

Post by cs702 »

baxtr wrote: post #125
cs702 wrote: post #120

Earlier quoted context omitted.

The amount of capital tied up in fixed assets is only one component of the capital required. Many other short-term and long-term assets can be components. Every business is different. For example, a consulting firm may have almost no fixed assets, but let's say its customers are mostly large corps that take 90-120 days to pay invoices. When the firm gets hired for a new project it must cover its expenses for 90-120 d…

Thanks for that. So in other words: something like amazon is not a good business for Buffet since they have to finance the inventory for a couple of month at least?

Change in inventories is only one component of capital required. There are many other components. There are great businesses that carry lots of inventory. Every business is different.

Amazon, in particular, is a large entity incorporating numerous businesses (AWS, Prime, Alexa, Merchant Services, proprietary brands, etc.) that are different from each other. Each should be analyzed on its own, because their dynamics are different. For example, Merchant Services is a platform for third-party sellers. They, not Amazon, are the ones who pay upfront for the inventory. They pay Amazon to store and manage that inventory. When a product in that inventory sells, Amazon gets to collect the money upfront from consumers. The sellers get paid sometime later.

Here's a decent primer on estimating return on invested capital: https://www.morganstanley.com/im/publication/insights/articl...

Re: Operating Margins

#127

Post by baxtr »

cs702 wrote: post #126
baxtr wrote: post #125

Earlier quoted context omitted.

Thanks for that. So in other words: something like amazon is not a good business for Buffet since they have to finance the inventory for a couple of month at least?

Change in inventories is only one component of capital required. There are many other components. There are great businesses that carry lots of inventory. Every business is different. Amazon, in particular, is a large entity incorporating numerous businesses (AWS, Prime, Alexa, Merchant Services, proprietary brands, etc.) that are different from each other. Each should be analyzed on its own, because their dynamics a…

Yeah sorry, I should have said online retailer. I had amazons original business in my mind.

Of course you’re right that it’s a complex business nowadays.

Re: Operating Margins

#129

Post by Swenrekcah »

quietbritishjim wrote: post #121
Swenrekcah wrote: post #119

Earlier quoted context omitted.

I agree that banks and many financial instruments are valuable and do facilitate value creation in the world. But that is the extent of it, they facilitate others to create value but do not make any on their own. They are however very well positioned to extract the profit from other industries and that is why the financial world can be so lucrative. Also, even if some financialization is beneficial that does not mean…

That's like saying that, when you farm wheat, the wheat plant did the value creation and the farmer just facilitated it. Facilitating value creation is value creation.

I get your point, I believe I acknowledged the usefulness of financial instruments.

Nevertheless it is not exactly the same. A carpenter’s apprentice is useful only when paired with his master. He facilitates the carpenter in his value creation but lacks the skills to do anything on his own.

Unlike the apprentice however, finance never actually learns the stuff.

Again, all of this has it’s uses and all, it’s just gotten a bit out of hand in terms of gambling like behaviour and the push the financial world creates towards harmful monopolies.

Re: Operating Margins

#130

Post by cs702 »

baxtr wrote: post #127
cs702 wrote: post #126

Earlier quoted context omitted.

Change in inventories is only one component of capital required. There are many other components. There are great businesses that carry lots of inventory. Every business is different. Amazon, in particular, is a large entity incorporating numerous businesses (AWS, Prime, Alexa, Merchant Services, proprietary brands, etc.) that are different from each other. Each should be analyzed on its own, because their dynamics a…

Yeah sorry, I should have said online retailer. I had amazons original business in my mind. Of course you’re right that it’s a complex business nowadays.

The portion of invested capital tied up in inventory is not sufficient to judge a retailer. What we want to know/estimate is the retailer's return on invested capital (ROIC). A retailer with significant competitive advantages that can generate above-average ROIC for many years to come is a good business. If, on top of that, that retailer can be acquired at a sensible valuation in relation to such future ROICs, it would also be a good acquisition.
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