You Don’t Know if That is a Big Number
This post is not a big deal, but I did want to vent briefly about one of my pet peeves: Citing raw profit numbers as evidence that some corporation is making huge profits.
How often do you read a news story in which some journalist or activist makes a claim that XYZ Corporation is extremely profitable because they recently had $253.7 million (or some other big number) in profits? Such numbers, of course, tell us exactly nothing about how profitable XYZ Corporation is. Sure, $253.7 million is a lot of money to me, but I have no idea if it is a lot of money in this context. Furthermore, without a bunch of other information there is no way that I can tell if $253.7 million is a lot of money. One possibility might be to site revenue statistics to me. For examples, if they had profits of $253.7 million on revenues of $10 billion this means that they had a profit margin of about 2.6 percent which is not much to write home about. On the other hand, profits of $253.7 million on a $1 billion in revenues suggests a profit margin of something like 25 percent, which is pretty profitable. Of course, even looking at profit margins isn’t as probative of profitability as one might assume. One still has to ask the question of how much capital is at issue. For example, if you get $253.7 million on $1 billion in revenues, you have a nice looking profit margin of 25 percent. On the other hand, if there is $25 billion in capital invested in the business, then we are looking at a return of something like 1 percent on the capital, which isn’t really all that impressive. Of course, even this number doesn’t fully capture stuff like risk or contingent liabilities. This is why I get testy when some politician or pundit cites some impressively large number and then opines about how very, very profitable business X is. The truth of the matter, I suspect, is that the pundits and politicians have no idea whether or not business X is profitable. Scarier still, they probably have no idea that they have no idea how profitable business X is. It really bugs me.
Okay, I feel better for having gotten that off my chest.