4 ms·

That isn't quite right. What it implies is that debt service is a significant fraction of their margins, which is a subtle but actually quite significant differ

by darawk 4y ago

That isn't quite right. What it implies is that debt service is a significant fraction of their margins, which is a subtle but actually quite significant difference. If a grocery store makes 1% profit on each item it sells, and its debt service cost is 1% of its revenue (making it roughly "1% of its cost") a doubling of debt service cost wipes their margin to zero.

thfuran 4y ago
But only requires 1% increase in revenue to sort out.
- darawk 4y ago
  No! A 1% increase in revenue in this situation does make you profitable again, but only barely, and only with some possibly invalid assumptions. Say you make $100 in revenue and $1 in profit, and $1 of your $99 in costs is debt service. Your debt service increases to $2, your profit drops to zero. Now your revenue increases to $101, presumably your debt costs stay fixed (this is not a guarantee - revenue expansion costs money), but your non-debt-service costs scale as well, and they are now 0.98 * $101 + $2 in debt service = $101.98. Congratulations, your profits are positive again, but they are $0.02. I am eliding here the general difference between fixed costs and variable costs, and so it's probably not true that your costs would scale quite this much with revenue, but it's much closer to the truth than that you'd be back where you started, esp. in a low margin business.
- Kye 4y ago
  There's a reason margins are what they are in a competitive market. "Your margin is my opportunity," as Lord Bezos famously said. Only companies that have captured their market get to raise prices to cover new costs, and all it does is induce people who want to own that margin to find flaws in the business model. This is how Netflix wrecked Blockbuster, and how Amazon killed off chain bookstores.
- shitpostbot 4y ago

4 ms·

That isn't quite right. What it implies is that debt service is a significant fraction of their margins, which is a subtle but actually quite significant differ

by darawk 4y ago

thfuran 4y ago
But only requires 1% increase in revenue to sort out.
- darawk 4y ago
  No! A 1% increase in revenue in this situation does make you profitable again, but only barely, and only with some possibly invalid assumptions. Say you make $100 in revenue and $1 in profit, and $1 of your $99 in costs is debt service. Your debt service increases to $2, your profit drops to zero. Now your revenue increases to $101, presumably your debt costs stay fixed (this is not a guarantee - revenue expansion costs money), but your non-debt-service costs scale as well, and they are now 0.98 * $101 + $2 in debt service = $101.98. Congratulations, your profits are positive again, but they are $0.02. I am eliding here the general difference between fixed costs and variable costs, and so it's probably not true that your costs would scale quite this much with revenue, but it's much closer to the truth than that you'd be back where you started, esp. in a low margin business.
- Kye 4y ago
  There's a reason margins are what they are in a competitive market. "Your margin is my opportunity," as Lord Bezos famously said. Only companies that have captured their market get to raise prices to cover new costs, and all it does is induce people who want to own that margin to find flaws in the business model. This is how Netflix wrecked Blockbuster, and how Amazon killed off chain bookstores.
- shitpostbot 4y ago