Calculating Profitability

[palm]

Assets = Liabilities+Equity(Revenues-Expenses)


I know accounting basics, I don't have much experience with finance though. Over some thought and inspiration, I have come up with some ideas with much, much thanks to the people of the economic forum.


I have my idea and concept down, and it will probably be developing, but it is more than an "idea" at this point. I will create a model. Nothing has happened but Im committed.


With revealing to much about my model, and its a good one. I think so.

By looking at Income Statements, Cash Flows, Balance Sheets, Statements of Equity of other businesses with similar models and analyzing their individual obstacles, ideas, etc. Will this be enough to judge the profitability of a business model?

[pauljmccain]

That is a balance statement, the book value of a company.

Your profitability is the money you take in (revenue), minus all expenses.

Then you have to figure out how much it costs to get the money you need for the business. So if your bank loan is 10%, you need to make more than that in profits.

[oyarde]

In what country ? The days of new , successful startups in the US are withering quickly . I read everything a company has on the books before I buyone share of stock , there are certain ratios of things that I use to determine risk , if it not a product that I think has a future ( few really do in the current & coming , likely climate ) and it does not meet ratios , I would be better off to do something else.

[pauljmccain]

He asked about profitability. I believe you're asking or trying to say something about investment and equity valuation?

Either way, I think your statement that "the days of new, successful start-ups are withering quickly" is flat-out wrong. Here's a list of the 500 fastest-growing companies in America. Most less than 10 years old. Most with revenue in the tens of millions. And all with 3-year growth of over 600% http://www.inc.com/inc5000/list/2011

[oyarde]

He asked about profitability. I believe you're asking or trying to say something about investment and equity valuation?

Either way, I think your statement that "the days of new, successful start-ups are withering quickly" is flat-out wrong. Here's a list of the 500 fastest-growing companies in America. Most less than 10 years old. Most with revenue in the tens of millions. And all with 3-year growth of over 600% http://www.inc.com/inc5000/list/2011

What do you think the next ten years and a Thirty Trillion dollar debt will do ?

[teacherone]

Assets = Liabilities+Equity(Revenues-Expenses)


I know accounting basics, I don't have much experience with finance though. Over some thought and inspiration, I have come up with some ideas with much, much thanks to the people of the economic forum.


I have my idea and concept down, and it will probably be developing, but it is more than an "idea" at this point. I will create a model. Nothing has happened but Im committed.


With revealing to much about my model, and its a good one. I think so.

By looking at Income Statements, Cash Flows, Balance Sheets, Statements of Equity of other businesses with similar models and analyzing their individual obstacles, ideas, etc. Will this be enough to judge the profitability of a business model?

I'm no expert but I assume it's very difficult to judge the future profitability of a "model" without lots of market research. How else would you begin to make any judgments about a business that doesn't yet exist?

[pauljmccain]

Your statement may be true in 10 years, but like I said, right now, your statement is wrong. The last thing we need is for people to run away from private American startups. That's really the only thing keeping the domestic economy going.

[oyarde]

Your statement may be true in 10 years, but like I said, right now, your statement is wrong. The last thing we need is for people to run away from private American startups. That's really the only thing keeping the domestic economy going.

I do not want people running away , But if you were living down the way from me and asked me , I would tell you what I believe to be true for the future . Current avg cost for business in US is 36 cents per dollar to meet all tax and govt regulation , with no serious proposed govt spending cuts , oil priced in dollars , the future does not look bright...

[oyarde]

I'm no expert but I assume it's very difficult to judge the future profitability of a "model" without lots of market research. How else would you begin to make any judgments about a business that doesn't yet exist?

Valid observation, forinstance , you cannot compete with many existing businesses and would be doomed if you wanted to try and take market share from Coca Cola etc , it would just fail...

[Paul Or Nothing II]

What do you think the next ten years and a Thirty Trillion dollar debt will do ?

The debt is NOT to be paid by all those companies directly, US can go down in terms of living-standards & yet good American companies CAN stand still; future is never certain, that's what markets are about but we take risks that we deem fit, anyone who is unwilling to take risks is unlikely to go anywhere in life, risks are part of life, it's about how you manage them!

Economic decisions are about choosing the BEST POSSIBLE ALTERNATIVE, what do you think that will be for investors once US goes down? There isn't a clear one & it's perfectly possible that good US companies will continue doing well despite general economic decline simply because there are only a few better alternatives for investors to put their monies in

[oyarde]

I thinkthat is possible too , but more likely , only for companies that have products that are neccessities .

[rpwi]

By looking at Income Statements, Cash Flows, Balance Sheets, Statements of Equity of other businesses with similar models and analyzing their individual obstacles, ideas, etc. Will this be enough to judge the profitability of a business model?

Yes and no. It can give you a good idea. But calculating profit is tricky stuff (which is why you see tax earnings and corporate earnings vary). The problem is that income income statements are so easy to manipulate. Many corporations play shell games in which companies own companies...and the only purpose of this is to report the taxes in one company as being flat or negative. Depends on the type of company... Any company with long term expenditures and investments is always trickier to figure out because of the variability and subjectivity in which they can deprecate assets and expense out R&D over time. Really anytime you have to 'estimate' the duration of an asset or investment...you'll get into accounting trickery. Same goes with the health of assets (like bad loan assets). Then there is the matter of odd-ball variables like goodwill from buyouts...this can be a mess.

If you are looking to invest...probably the best measure is predictability...if the company's earnings are not erratic that is probably a good sign.

[pauljmccain]

Income statement manipulation isn't quite as rampant as you suggest. If any of the above actions are undertaken, they are reported by law in the filing documents right next to the income statement. And they are accounted for in the income statement.

Just look at the operating income if you want to see a number without any depreciation and amortization included... EBITDA. Simple.

[teacherone]

Is he trying to measure the business model of a future business to estimate predicted profit? Or just trying to read a balance sheet?

[palm]

Is he trying to measure the business model of a future business to esitmate predicted profit? Or just trying to read an balance sheet?

I know how to read a balance sheet, I'm interested in finding out what it cost similar businesses monthly and my first period would be scaled to that number relative to the saturation of the market searching for my service, competition and resources, if that makes any sense.

In order to do this and know how much capital to invest, I will have to know how much I will make. If at all possible.


Im gonna start a kick start campaign.

[osan]

I'm no expert but I assume it's very difficult to judge the future profitability of a "model" without lots of market research. How else would you begin to make any judgments about a business that doesn't yet exist?

The instrument is called a "proforma" and is basically a best guess. The better your analysis, the more impressed will be investors, for instance. If it does not exist there is no way to predict how it will do. Some guesses are on, some are not.