As a follow-up, here’s just one specific illustration of how you can be fooled by looking at profit margins: Yum Brands (owner of Taco Bell, Pizza Hut, and KFC).
Over the 2015-2017 period, Yum experienced a massive increase in operating profit margin:
(This is pre-tax operating income divided by total revenue). Is this an unsustainable increase? No, it’s a shift from company-owned stores to franchises, and the important consequence of that shift is not economic, it’s accounting. Here’s why:
For company-owned stores, Yum reports both gross revenues and total expenses for those stores. For those company-owned stores, their operating profit margin is a pretty consistent 16-17%. This is revenue recorded on a gross basis.
For franchised stores, Yum DOES NOT report the gross receipts for those stores as revenues. Instead, the only revenues recorded by Yum are the franchise fees received. Similarly, Yum DOES NOT report the franchise-level expenses (i.e., cost of food and labor) because those costs are incurred by the franchise owner rather than Yum. Because Yum reports franchise revenue effectively on a net basis, each dollar of franchise revenue has a pretty consistent operating profit % of 90% or so.
What’s happened over the last few years is that Yum has been transitioning away from company-owned stores towards franchised stores. This has very little effect on the economics of the individual store locations. Nor does it have much of an effect on Yum’s bottom line earnings, which are what ultimately determine the firm’s value. But it has an enormous effect on Yum’s reported profit margin because they’re shifting from a gross revenue model to a net revenue model.
This same phenomenon applies to:
companies with joint ventures. The company’s proportionate share of the joint venture’s income is reported as revenue on a net basis, so the implied margin is 100%. But that doesn’t mean the joint venture has a 100% profit margin, it just means that the expenses are netted before being reported as income on the Income Statement.
intermediaries like Priceline (Booking). In a gross revenue world, they record the total cash received from customers as revenue and deduct the price of the ticket/hotel room as expenses. That results in a pretty modest profit margin. But in a net revenue world, the effectively just record their commission as revenue (i.e., total received minus cost of ticket/hotel room), leaving them a close to 100% margin.
any other franchised firm
Most of these accounting distortions wash out if you’re looking at bottom line earnings, but they have the potential to massively distort profit margins. Which is why profit margins are a terrible metric to use in order to assess current levels of firm profitability and whether they’re sustainable.
So given what you posted here how sustainable do you think corporate earnings are? You’ve just presented a compelling case for why profit margins are the wrong thing to watch (and my own personal experience with business confirms this. In my industry I’d much rather book a load for 5,000 where my margin is 8% than a load for 600 where my margin is 20% for obvious reasons)
Being wrong about this 10 or 12 years ago when a solar panel costs more than $4/watt was an innocent enough mistake, but now that you can get them for under $.40/watt it isn’t so innocent.
Also, California has more power than it knows what do to with at the moment. Building or spending hundreds of millions of dollar to fix a nuclear power plant, let alone one that has rotting storage containers sitting on the beach, would be idiotic.
In fairness solar has real problems with storage. Yes they make power during daylight hours in places like CA literally free… but what to do when the sun goes down and it’s still hot as hell.
Nuclear is definitely part of the solution. We just need to agree on a permanent place to house the waste material.
I am biased, but I also know a lot more about this than you or boredsocial. And I didn’t become pro-solar because I went into solar. It was the other way around.
Long term contracts for solar with storage are already cheaper than coal in some cases, let alone nuclear.
How are they storing the power? Batteries are still fairly expensive (and more importantly those prices would get MUCH higher if you actually tried to deploy them at a scale that threatened natural gas… coal is no longer particularly important since it gets waffle crushed on cost by almost every power source) and other forms of energy storage seem like they need very special setups.
Meh. In a previous lifetime I was in gaming (table games manager) - longstanding joke about upstairs was that they were ecstatic holding 10% of $1000 but would fire you for holding 3% of a million. Idiots are everywhere.
Who is the competition? It’s Lyft (also losing money) and cabs (horrible). They obviously can’t charge infinite money, but no reason to believe that they can’t cover their costs.
What about the fixed costs of installation? Higher or lower with the amount of solar panels required to power say, 90% of the nation?
I obviously don’t know the numbers like you do, but I imagine a system of nuclear plants would be far easier and cheaper to build than the sheer amount of space and material required to power with solar. It has to be, in my mind. Forget about cost per kwh. That comes after the fixed costs.
I’m not really trying to say nuclear is a silver bullet but it is a very clean and efficient solution to a very large problem that most of society rejects exists. In that case I’d favor the easier solution that comes at a cheaper initial cost and political pricetag.
I’ll post more on this later, but the contract price per kWh includes construction. A plant builder pays for construction and maintenance in exchange for a contract to buy energy for a period (like 20 years) at the contract price. Same thing happens for conventional power plants. It’s the apples to apples comparison (except externalities are much higher for ff or nukes)
I mean even a simple google search is telling me the cost of nuclear is compareable with what you’re saying, but it seems hard to find solid numbers on this subject without having to dive through a shitload of propaganda.
Nuclear costs imo, are wildly understated. There are a lot of subsidies and magical thinking regarding waste.
And those costs aren’t going down, while the costs of renewables and batteries are a small fraction of what they were a decade ago. No new nuclear plans will go from planning to operation in less than a decade or so.
It should be said that nobody is saying that solar isn’t going to be the dominant form of solar generation in as little as 10 years. It’s super cheap during the day. I’ve gone as far as trying to game out what a world with nearly free daytime energy would look like. It’s a much bigger deal than it appears.
High generation/low prices when the sun is on. Huge demand when the sun starts to go down and everyone gets home and puts the A.C. on.
In a solar economy. You need power sources that compliment that.
Pumped hydro and gas are the two most important, and then its about battery storage. Either big megawatt stuff. Or home battery.
You need stuff that can go on and off quickly, with different economics.
My guess is that nuclear has high fixed costs and minimal marginal costs, so having it sit there earning nothing while the sun is shining probably isn’t good.
