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Discourse on business
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| Senator_Ordan | Date: Tuesday, 16 Oct 2012, 6:38 PM | Message # 1 |
 Lieutenant general
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Messages: 633
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| A little discourse on how businesses work (I realize not all of us have worked in business)
Players are evidently generally unaware of fiscal reality and this is being reflected in unrealistic requests in unrealistic timeframes.
Mergers and acquisitions are a bit like relationships, one flirts at first and later commitment may build over time. A merger of even moderate size can take months to be transacted (the same or longer with a acquisition), just the due diligence alone (the legal scrutiny) can take months. Companies which merge are often of similar size as this allows the process to be transacted.
Mergers are generally favoured over acquisitions (which are extremely expensive) when one company merges into another, stock is distributed as per the merger agreement and it's extremely rare for them to make anything less than a profit. Buying up big companies wholesale is difficult, expensive, and in many cases simply not possible for any price.
Shareholders often have extensive rights regarding blocking acquisitions, and even if they do not, often have the right to block decisions they don't feel are in the best interests of the company (even if they are in the minority) - this is to say they will not likely allow big or old companies to be simply "eaten up" or their IP to be stripped.
Most importantly, customers generally are extremely uncomfortable with mergers or purchases of companies they already transact with especially the latter.
Big companies rarely have one owner, they're largely "publicly traded" which means they're open to investment and sale on the stock market - large sole owners are rare (and usually inefficient), in most jurisdictions it is a legal requirement to have limited liability at a certain level of corporate value - that is to incorporate the company as a separate legal "entity" (called a limited company) from just "your property", meaning it has a degree of independence irrespective of shareholding by others (the company is legally obliged to be run for the company's, not just the individual's interest). They cannot be used as "piggybanks" by their owner.
Also, prominent conflicts of interest seem to start to be springing up in the game, are conflicts of interest. I think they need to be knocked on the head.
On profits, margins and cashflow
Margins
So I don't have to reinvent the wheel heres a quote from an article here.
"Examples of Profit Margin
Gross profit margin is the total profit divided by the total sales. If a company makes $100,000 total profit on $500,000 in sales in a year, its gross profit margin is 20 percent. Net profit margin is the net profit divided by the total sales. If the above company spent $50,000 on sales-related expenses to reach its $500,000 total sales, then its net profit is only $50,000 for a 10 percent net profit margin.
High-Margin Companies
High-profit-margin companies make a relatively high amount of profit per unit sold compared to low-margin companies. Typical examples of high-margin businesses are high-end retailers, software and jewelry. High-margin companies therefore have a low cost of sales compared to revenues and sell a smaller total number of products to make the same profit as a low-margin company.
Low-Margin Companies
Low-margin companies make a smaller amount of profit per unit sold than high-margin companies. Airlines, grocery stores and low-end retailers are typical examples of low-margin businesses. These companies tend to be in competitive industries and have to sell a large number of products relative to high-margin companies to make the same amount of profit."
Examples of generally high margin industries (the average across these industries per year (as of 2011) ranges from 9-17%). High profit/turnover margin doesn't always make a company a good investment as their turnover may render them unprofitable, generally they're regarded as riskier but potentially more profitable.
Financial services
Medicine
Education
Burial and funerals
Science
Software
Technology
Examples of generally low margin industries (2011) - these arent always undesirable options for investiment, they're just not really very dynamic - they are often regarded as "defensive" stock, low risk:low profit:
Defense
Security
Automotive
Food processing
Shipbuilding
Profits
The average profit from a company in the real world (over the past 75 years) is around 4.9%
The highest ever average profit from the world top 500 companies was circa 7.8%
The 2012 levels in a selection of industries.
At 20% (considered an extremely high profit:income ratio), a company could buy a similar sized one every five years. You could borrow based on high profits or sell stock to raise funds, but even a high turnover and profit does not generate enough to buy up similarly sized corporations anything like as regularly as has been going on in the RP.
Cashflow
Companies who primarily generate income from contracts with governments rarely attract exceptional profit - but equally rarely loss as these represent steady sources of income. You do not "get rich quick" by getting these contracts in the vast majority of circumstances. Cashflow is extremely important to generate profit but should not be mistaken for profit.
Yes there are examples of extremely high rates where there is a new innovation by a particular company, new resource deposit discovered etc; these are the exception not the rule.
Senator Hubert Ordan
__________________________
Senator of the Azure Sector
Foreign Minister of Anaxes
Captain-General of the Azure Interest Protection Squadron
Deputy Chairman of the Ethics Committee
Worshipful Master of the Most Loyal and Honourable Company of Blockadeers
Archtreasurer of the Vault of Pols Anaxes
Autocrat of Selgon
Owner of Azure Durasteel
Systems Admiral (Ret)
Order of the Canted Circle
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| Aulus_Decius | Date: Tuesday, 16 Oct 2012, 8:47 PM | Message # 2 |
 Private
Group: Users
Messages: 9
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| Long story short, slow and steady wins the race!
Aulus S. Decius
CEO & President, Decius Industreis (DIA)
Majority Non-Controlling Shareholder, Rothana Heavy Engineering
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| Jace_Varitek | Date: Tuesday, 16 Oct 2012, 9:08 PM | Message # 3 |
 Generalissimo
Group: Administrators
Messages: 2245
Status: Offline
| Not for Bain Capital.
Jace Varitek
Manager/Administrator from January 2003 to Present
My recent posts here, pre-2009 archives here
"When my information changes, I change my opinion. What do you do, sir?"
—John Maynard Keynes
Furthermore, a dancing Wookiee:
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| Verence_Terrawin | Date: Wednesday, 17 Oct 2012, 1:22 AM | Message # 4 |
 Major general
Group: Users
Messages: 285
Status: Offline
| No, slow and steady does not always win the race.
But it depends on which race you're entering.
If you want to have a safe investment, low profit margins may not be a problem so long as they are reliable profit margins; a steady 5% profit is worth holding on to, especially in troubling economic times. If you have the time to hold on to these stocks to see them grow you can make money without too much risk.
If you want to make big bucks more quickly, high profit margins are for you. Profit is inversely proportional to risk as a rule of thumb and high margin companies often lack security. These can get as high as 20% a year in some industries (exceptionally rare for the big 20 to be reached though).
Now, some companies attempt to offset this risk by having a "mixed bag" of high margin and low margin companies producing unrelated products. This is called a conglomerate. Take one of the worlds foremost conglomerates, Samsung Group, it has numerous businesses, some high margin (Samsung Electronics) some low (Samsung ship building), it generated last year (one of it's best) a 7.8% profit margin - roughly in line with the world top 500 company average for the year. These are historically hugely unpopular on the financial markets as theyre generally extremely poorly run with overcomplex decisionmaking structures.
If you buy up companies and integrate them into yours, you create a conglomerate, you can count on a steady investment portfolio which will mature over the years. Conglomerates generally do not make large purchases of other companies.
If you buy up companies sell them as soon as you make a profit, you're a venture capitalist. Venture capitalism can make huge profits very quickly this way. or you can lose it in a single bad trade. These make money not from the profits of the companies they buy and sell but from the sale of the companies themselves.
I've found a bit of a disconnect with reality in the RP, if you buy up company x one month, unless you sell it the next month - or sell a lot of it in shares and borrow the rest (at a slight profit) you cannot buy company y which is of the same size as x based on the profits of x alone. Everyone seems to rush to make purchases on the assumption of "profits paying", but the reality is you can't finance rapid growth this way. Rapid growth needs to be funded another way - borrowing and selling stock. If you need capital to buy things, you need a financial plan that adds up to get credit (and assets to borrow against) or sell stock (which causes you to lose much of your control of the company's affairs).
Basically.
5% is a low profit margin
10% is a high profit margin
20% is a very high profit margin
Anything higher is exceptional
Verence Terrawin
Senator of Alsakan
First Lord of the Foreign Office, Alsakan
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