tag:blogger.com,1999:blog-24338064.post7717791982940409301..comments2024-02-11T19:28:27.997+11:00Comments on Personal Reflections: Problems with profitsJim Belshawhttp://www.blogger.com/profile/10075614280789984767noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-24338064.post-76493889141693014502010-05-28T05:16:21.880+10:002010-05-28T05:16:21.880+10:00Absolutely agree, Ramana. Profit characteristics d...Absolutely agree, Ramana. Profit characteristics do vary depending upon the lead times and on the sector. Current reporting requirements do lead to short termism.Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-2408843990836993802010-05-28T01:06:52.621+10:002010-05-28T01:06:52.621+10:00Net profit per se is a meaningless figure unless i...Net profit per se is a meaningless figure unless it is related to it being a return on the investment made. For instance, a low margin high turnover product can generate very satisfactory returns on the investment made, with prudent working capital management. On the other hand, long gestation project revenues have to reflect very high profits on a cost related result as, the working capital and other forms of capital are locked up for very long periods with usually low cash inflow during the duration of the projects. The point that you make that the P/E as projected is not worth the paper it is written on is absolutely correct. It is usually done to satisfy some reporting system which is used by the Board to indulge in some PR to push stock prices up. Anonymous is right in that this is what makes managers short term driven. Owner managed enterprises, particularly small and medium sized ones, do not suffer from this malady.Rumuserhttp://www.rummuser.comnoreply@blogger.comtag:blogger.com,1999:blog-24338064.post-46685693344501934622010-05-25T19:41:47.241+10:002010-05-25T19:41:47.241+10:00David, I should have fed you! Roast beef. More lat...David, I should have fed you! Roast beef. More later.Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-46923293561263541872010-05-25T18:37:33.212+10:002010-05-25T18:37:33.212+10:00Well! I think I would much prefer to be sitting d...Well! I think I would much prefer to be sitting down to your dinner, than to be responding to your comments.<br /><br />Your “Problems with profits” post started with a highlighted comment by Ramana with which I found myself simply nodding in agreement as a statement of the obvious. Then in your latest comment you said “I know of no evidence that the current approach actually increases other than short term profit however measured” - and again, I just nod in agreement – because from the manager’s perspective, what other objective can there be?.<br /><br />Jim you may correct me on the statistics but my present understanding is that ‘managers’ – be they MD’s of banks, or Klopper of BHP, or Fred at the local Bunnings – have a limited “life” (5 years or so?) and are all very engaged with short term performance because that is how they are rewarded. <br /><br />To say this is either “right”, “wrong” or “not in the best interests” of the commercial entity is simply to deny the commercial reality that they are judged in their present job (and for future jobs) by their short term performance. Ramana put it better, simpler.<br /><br />I am not disagreeing with your longer term analysis and goals, but I am suggesting that we probably won’t see a Gail Kelly tell her board “look, you won’t see an improved bottom line immediately, but hang in there – in 20 years time you will thank me; of course I’ll be retired by then with my options, but it will work out”.<br /><br />My response was about commercial reality, as opposed to what might be “best for us” in the longer term. But maybe I misunderstood; and maybe the sky is pink. But dinner would have been short term good.<br /><br />kvd<br />ps P/E ratios are just historical artefacts. Fear/Greed is the "new now". And the LIBOR rate is rising...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-24338064.post-27170007899349742952010-05-25T17:30:16.328+10:002010-05-25T17:30:16.328+10:00Hi KVD. Your comment came up while I was respondin...Hi KVD. Your comment came up while I was responding to LW. I am not concerned with ethics on this on, but with results. <br /><br />I stand to be corrected, but I know of no evidence that the current approach actually increases other than short term profit however measured. Further, there is a fair bit of evidence that most of those firms who make increasing profits central actually underperform. <br /><br />There! Now I have to cook dinner once more. I look forward to your comments!Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-54501585251878574812010-05-25T17:19:22.057+10:002010-05-25T17:19:22.057+10:00Part of the problem, LW, comes back to the way pro...Part of the problem, LW, comes back to the way profit is defined as well as the emphasis placed upon it. <br /><br />Firms have to make profits to give a return to shareholders and to fund future investment. If that investment is done sensibly, total profits should increase, but not necessarily return on total assets.<br /><br />There is nothing wrong, either, with firms seeking to increase profits measured by return on investment. That's normal.<br /><br />However, when maximisation of short term profit measured in absolute terms and by ROI becomes central, when the totality of firm targets exceeds what is possible by a significant margin, when the firm is judged in market terms by its failure to deliver on forecasts, the system becomes unstable, profits unsustainable.<br /><br />With a stable ROI, you can increase earning per share by borrowing, for example, so long as the cost of borrowing is below ROI. You may also increase earnings per share in some conditions by buying shares back. Both have their place, but also their problems and their limits.<br /><br />To my mind, the biggest problem of all with an obsessive focus on profits is the damage done to staff, to customers and to the longer term survival of the business itself.Jim Belshawhttps://www.blogger.com/profile/10075614280789984767noreply@blogger.comtag:blogger.com,1999:blog-24338064.post-70281006727208013102010-05-25T17:09:44.108+10:002010-05-25T17:09:44.108+10:00Jim
Ramana's comments were as realistic as th...Jim<br /><br />Ramana's comments were as realistic as they were unremarkable and, I expect, born out of long experience. This is a simple fact of (commercial) life that may not gel with your wider societal or ethical concerns.<br /><br />This year's 'profit' - however defined - must exceed last year's profit. If not, you are not managing, you are just getting by - or more likely, going backwards.<br /><br />(Can't remember seeing any bonus or share option schemes based upon just getting by - and taken to extremes you get Bernie Madoff, the China milk scandal, and Conrad Black)<br /><br />I think Ramana is perfectly correct in his comments, and your conclusion to your point #4 "likely to substitute short term gains..." is just another statement of sad commercial reality. And I do understand you were not making the point with that in mind.<br /><br />kvdAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-24338064.post-78165464419111121072010-05-25T10:20:54.686+10:002010-05-25T10:20:54.686+10:00I agree about the constantly improving bottom line...I agree about the constantly improving bottom line. Why? Why is it not enough to simply make a profit (surely the aim of businesses), why must they constantly make a <i>larger</i> profit than previously? How can that ultimately be sustainable?lemmiwinkshttps://www.blogger.com/profile/12897071451229534159noreply@blogger.com