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4. Re: More Big Picture Details Sep 16, 2012, 15:13 DG
jdreyer wrote on Sep 16, 2012, 14:20:
I used to work for a section of a fortune 500 company that made niche software. We were a dominant player in the industry. In one section, we provided the main software for the #1 and #2 largest companies in the industry in the USA. Our customers were extremely satisfied: our retention rate was 98%. However, b/c our section was only about 10% profitable and not 20% (the corporate profitability "standard") they were shopping us around and were going to shut us down until the SVPs bought us out and spun us off into our own much smaller company. 10% profitability and a dominant player in the industry and they were going to shut us down. Insanity.
One possibility here is 10% profitability is whilst consuming a ton of cash.

Say a division turns over $100 and makes $10 in profit. So far so good. But what if it is soaking up $1,000 of cash in order to do so? Equipment, work in progress, debtors... The return on investment is only 1%. ROI is much more important for a listed company than net profit ratio.

Another possibility is that the 10% is before HQ costs (or even other costs/opportunity costs like rent on owned premises). Some companies literally bill a recharge of the HQ costs, so it comes out of internal accounts, in others it's purely a year-end accounting thing, in which case nobody realises it's a loss except accounting and the board.

Or, obviously, the company were just insane douches.
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