Business cost is Selling/General/Admin Expenses and Research and Development. The Business Cost to Gross Profit ratio must be less than 80% for the company to be a worthy investment. A ratio of is less than 30% is better. That means the company could have a Durable Competitive Advantage working in its favor. Typically, companies that have a Business Cost to Gross Profit ratio of less than 30% do not have any Research and Development costs.
Equations
Business Cost:
For a good company:
For a great company:
Example 1For the year 2010 Coca-Cola spent $7.199 Billion on Selling/General/Admin Expenses and none on Research and Development. Their Gross Profit was $22.426 Billion.
Date: Year 2010
Coca-Cola's Business Cost to Gross Profit Ratio is less than 80% and very close to 30%. It doesn't spend anything on Research and Development because the beverage business doesn't change much. Coca-Cola makes the same products year after year for over 100 years. This company is very, very profitable.
Example 2For the year 2011 IBM spent $22.865 Billion on Selling/General/Admin Expenses and $6.258 Billion on Research and Development. Their Gross Profit was $50.138 Billion.
Date: Year 2011
IBM's Business Cost to Gross Profit Ratio is less than 80%. They are the largest computer services company and spend little on Research and Development compared to their competitors. IBM is also very profitable.
Example 3General Motors, an American car manufacturer, spent $15.959 Billion on Selling/General/Admin Expenses in 2007 and none on Research and Development. Their Gross Profit for that year was $12.021 Billion.
Date: Year 2007
General Motors' Business Cost to Gross Profit Ratio was 132%! Way over the threshold of 80%. They were spending more money than they were making. Two years later, in the year 2009, General Motors filed for bankruptcy.
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Business Cost to Gross Profit |
