[euroclydon]

> Profits relative to revenues isn't a useful figure. An investor who sees a business as a black box where you put initial capital in and get money out, doesn't care what the revenue of the company is at all.

I can't see how an investor would not care. It seems that given a more profitable business, for a desired ROI amount, the capital input is smaller.

[mediaman]

Many manufacturing companies can run on much higher debt levels, because much of the debt is collateralized by resellable equipment (good for the bankers) and because their revenues tend to have lower variance (good for the shareholders).

This magnifies returns on equity, which makes them more competitive with non-manufacturing companies, which typically cannot run on as high of debt levels because they don't have the same kind of collateral.

So typically you probably do have lower returns on invested capital (the entire capital base, debt plus equity) but returns on equity might be comparable. And if the manufacturing business is more stable -- which it often is, compared to most more ephemeral businesses with few assets -- lower returns are acceptable because there is lower risk.

Of course not all manufacturing companies are lower risk than all non-manufacturing companies.

[euroclydon]

That's interesting. Do businesses which can run on higher debt levels consequentially provide fewer opportunities for investment?

[ajiang]

That's why you don't use revenue relative to profit as a metric, but various returns on invested capital as a metric, e.g. profit to debt, profit to assets, profit to capital expenditures, etc. Revenue is often a difficult figure to compare, as different companies in the same industry can record revenue in different ways depending on a multitude of factors (e.g. location in the value chain).

Put it more simply, if I have a business selling widgets and I need to invest $100 to start the business, it matters more what kind of profit I can get on that $100. If the widget I'm selling sells for $50 and I make $10 profit vs. sells for $500 and I make $10 profit, I'm still making $10 profit on $100 invested capital.

Now more often than not, I'd prefer to sell the higher margin product as it requires less working capital (such as inventory costs) which in itself has the 'cost of capital', but that's just the reality of some (fairly lucrative) industries you get into.

[rayiner]

> That's why you don't use revenue relative to profit as a metric, but various returns on invested capital as a metric, e.g. profit to debt, profit to assets, profit to capital expenditures, etc.

Sure, that's optimal, but they don't have that information easily accessible on Wikipedia for web debates...

I would be surprised if profits/revenues wasn't at least indicative of better measures like return on invested capital, at least for the companies in the above list.