03. Financial health
Recently I visited a client who had the question whether the finances of his company are in good shape. He asked me: what is a financially healthy company? Together we started by looking at the last two or three annual reports. In those the profit and loss is shown first. We looked at revenues first. This gives a feeling of how big a company is. Is revenues 1 Million or 10 Million or 50 Million Euro? Then we looked at the profit of the last years. It showed a loss for many years, because the company has been still building up. The last two years had a good positive result. We did the calculation profit divided by revenues and ended up at a percentage.
Depending on the type of business this varies. For instance a big drugstore like dm in Germany probably has 1% or 2% profit related to revenues. That would be typical for such a type of business. Also wholesalers have relatively small margins. But for instance a fashion brand company like Hugo Boss has a margin of 7% in 2016, and of 11% in 2015. In good times it probably can have a profit margin of 15% or more. Apple currently has a profit margin of 22%. This is very high. So what is a financially healthy company? Is it Apple and not dm? What is the 'price' for such a high margin of Apple? Is maximum profit healthy? I remember Goetz Werner, the founder and owner of dm say in a TV talk show a few years ago, that 1% profit margin is enough for him because he can than do a lot extra for his employees. With a 2% profit margin such money would not be available.