07-16-2014, 09:53 PM
(This post was last modified: 07-16-2014, 09:58 PM by earthtodan.)
My buddy and I have two views on profit margins. I like seeing them high, he likes seeing them low.
His view is that high margins are a vulnerability, and leave lots of room for price compression due to competition, etc. A high margin company can't gain much more by margin expansion. Whereas if a company can operate and grow and return cash to shareholders with low margins, then there's plenty of room for margin expansion, and more profit.
My view is that high margins represent safety, and low margins are dangerous. If a company runs on only 10% gross margin, then if its fixed costs increase 1%, its profit decreases almost 10%. Whereas if a company has a 90% gross margin and costs increase 10%, profit only decreases 1%. For example SBUX wasn't hurt that bad when coffee prices spiked 10% because the cost doesn't represent a large slice of revenue per sale.
Thoughts?
His view is that high margins are a vulnerability, and leave lots of room for price compression due to competition, etc. A high margin company can't gain much more by margin expansion. Whereas if a company can operate and grow and return cash to shareholders with low margins, then there's plenty of room for margin expansion, and more profit.
My view is that high margins represent safety, and low margins are dangerous. If a company runs on only 10% gross margin, then if its fixed costs increase 1%, its profit decreases almost 10%. Whereas if a company has a 90% gross margin and costs increase 10%, profit only decreases 1%. For example SBUX wasn't hurt that bad when coffee prices spiked 10% because the cost doesn't represent a large slice of revenue per sale.
Thoughts?