Monday, February 13, 2012

Revenue versus Profitability


The idiot media doesn't understand the difference between revenue and profitablity.

In this article on MSNBC, they lament "Companies that are shrinking" in terms of sales.  It is an idiotic article, and reflects the kind of thinking that gets people (and companies) into trouble.

Gross sales receipts - revenues - are not a sign of the health of a company.  Profitability is.  Indeed, when GM was going bankrupt, it had lots of sales of cars and trucks.  Problem was, its overhead was so high, it was losing money.  But according to MSNBC, those were the "good old days".

GM is leaner and meaner today - and more profitable.  They are better off selling fewer cars of higher quality at a higher profit than to keep all those factories running (per UAW contract) and cranking out cheaply made de-contented cars at marginal profit margins.

In fact, they used to tell us at GM, "if we could sell a million cars and make $1000 apiece on them, it would be the same as selling one car and making a billion dollars" - never confuse market share with profitability.

The MSNBC article lists all these companies that had drops in overall revenues, but fails to list their profitability in the corresponding time periods.  Yes, GM has lost market share, but it has increased profitability during the same time period.   Which is more important to the overall long-term survival of the company?

Companies that chase market share "at any cost" often end up bankrupt.  I recall one Silicon Valley company that got excited that it was almost a "Billion dollar a year company" in terms of total revenues.  So to get to that benchmark the next year, they focused on gross sales and not on net profits.  You can guess what happened.  They are nowhere near a Billion dollars in gross revenues anymore.

Volkswagen actually announced their corporate goal was to become the world's largest automaker - have the largest market share in the world.  And to do this, they took a good product - the Jetta and Passat, and de-contented them.  They installed cheap plastic dashboards, crappy twist-beam suspensions that would be more at home in a 1982 Citation, and a raspy 5-cylinder engine that I suspect is a refugee from the ill-fated Brazilian VW Fox (remember THOSE?).  Result?  A $15,000 car that tarnishes the image of "German Engineering" for good.

They might make that market share goal, but not for long.  Eventually, people will say, "What a crappy piece of shit this car is, I'll never buy one again!"  And they will tell their neighbors, and well, that is what happened to GM.

But more importantly, idiot stories like this really skew financial perceptions.  If you read this story, you'd think all of these companies were in deep financial trouble.  Some are, some aren't.  Most got out of financial trouble by reducing revenue and boosting profit.  This comment is typical:
These closures may have contributed to higher profitability, but they cut GM’s overall revenue. Lately, GM has begun to grow again. In its most recently announced quarterly results -- the third quarter of 2011 -- revenue increased to $36.7 billion from $34.1 billion in the same quarter of 2010.

This is not financial analysis or sound reporting.   It is just, well, bullshit.  Meaningless bullshit.  GM is profitable today, not in spite of decreased revenues, but because of it.  Saturn, Pontiac, Hummer, and Saab were not adding to the bottom line, but only detracting from it.  Yes, they increased market share and overall sales, but when you lose money on a vehicle, it ain't a plus for the company.

Use some common sense when reading articles like this.  And when you see a real boner article like this, consider whether you should take anything the news site says at face value at all....

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