# Australia Gross Profit Margins



## sinner (21 March 2013)

Anyone got a chart like this for Australian companies?


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## skc (22 March 2013)

I have seen it (or something quite similar) before but can't find it amongst the various reports I keep.

I will send it your way if I see it again or come across one in the future.


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## craft (22 March 2013)

I track corporate profit share - defined as corporate gross operating surplus divided by GDP. It’s more like a net profit margin though than a gross profit margin.





This ABS publication has Gross profit margins by industry (table 22)

http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5676.0Main+Features1Dec%202012?OpenDocument


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## sinner (24 March 2013)

Thanks skc and craft.

Good stuff craft, I guess as an approx that will do for me! Definitely appreciate the long duration of that timeseries.

How do you feel about CGOS being in the very high range of that very long term chart from a valuation perspective? 

a) New Normal where the % is consistently higher
b) Corp profits will decline to normalise
c) GDP will increase to normalise

A trip to the bottom of the range using my eyeball and tabletop calculator looks like about a 25% reduction in CGOS/GDP?


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## craft (25 March 2013)

sinner said:


> How do you feel about CGOS being in the very high range of that very long term chart from a valuation perspective?
> 
> a)	New Normal where the % is consistently higher





It’s probably doesn’t appear  so because of the horizontal axis lines but linear trend line for that series is up sloping  and the last data point is just about bang on trend.

The up slope in the trend may not be real, but rather emanating from the shortness of the time series.  Although it makes sense as a country gets richer it gathers more capital and that is generally employed through a corporate structure, so the up slope trend makes logical sense.

The late 200’s excursion into stretched upside did not occur in isolation - It coincided with a similar deviation in earnings series and terms of trade.

– there’s a small degree of uncertainty where the trend line truly sits but I see next to no probability that there has been a paradigm shift.  It’s a reversion to the mean series for me.



sinner said:


> b)	Corp profits will decline to normalise





That’s clearly what has happened to date.



sinner said:


> c)	GDP will increase to normalise.




Real GDP is the most stable of any series I follow.  If anything I suspect that its uptrend will slow slightly. The drivers of Real GDP are population growth and productivity.  Population growth of last few hundred years is unsustainable, no evidence that productivity can fill the gap of declining population. 

Nominal GDP, being Real GDP plus Inflation is more volatile because inflation is more volatile.  is that inflation will stay low/tammed for quite a while unless we have a huge supply shock.

So GDP will increase but not at a rapid rate and infarct probably a little slower than recent history. 



sinner said:


> A trip to the bottom of the range using my eyeball and tabletop calculator looks like about a 25% reduction in CGOS/GDP?





For GDP to get us to the bottom of the range whilst earnings hold stable would be a long drawn out process.

Earnings are the most volatile series but probably only a fraction as volatile as the markets price reaction to them.

From a valuation prospective I sit and watch and react when I think I can buy something at a price that offers an appropriate risk/return based on cash flows.

These big picture series are secondary for me to the economics of the actual businesses I invest in – for example a lot of macro series have largely been affected by the mining boom. The GFC offered wonderful prices in some non- mining companies even though the macro picture at the time looked dubious.


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## sinner (25 March 2013)

craft said:


> It’s probably doesn’t appear  so because of the horizontal axis lines but linear trend line for that series is up sloping  and the last data point is just about bang on trend.
> 
> The up slope in the trend may not be real, but rather emanating from the shortness of the time series.  Although it makes sense as a country gets richer it gathers more capital and that is generally employed through a corporate structure, so the up slope trend makes logical sense.
> 
> ...




Good stuff craft, I appreciate your opinion.


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## Huskar (25 March 2013)

craft said:


> Population growth of last few hundred years is unsustainable,




Just curious as to why it is unsustainable apart from the law of large numbers (and who knows where this will in fact kick in)?

The same has been said for the last 100 years but yields keep increasing and new methods are found for growing crops in formerly barren lands.

Do you keep track of what has in fact happened where population has stopped growing eg Netherlands/Switzerland (I think from memory?)

V interesting tho thanks


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## FlyingFox (25 March 2013)

Huskar said:


> Just curious as to why it is unsustainable apart from the law of large numbers (and who knows where this will in fact kick in)?





Short answer. Nothing in nature fits an exponential, and I mean nothing, expect for world population. Only way to have exponential growth is to have infinite resources. Since we don't we can't have this type of growth.

Less shorter answer. Population growth increases competition for resources, space etc. This causes social issues and smaller families, family groups and reduced net birth rate. This is happening now and it occurs much before any issues due to food shortages etc. Over time, population starts decreasing. 



Huskar said:


> The same has been said for the last 100 years but yields keep increasing and new methods are found for growing crops in formerly barren lands.




Most of the agricultural productivity increase were made after WW2. particularly from 1950's - 1980's and perhaps into 1990's due to mechanization, use of hybrids and modern farming methods. This has since leveled of (e.g Wheat).
http://en.wikipedia.org/wiki/File:Wheat_yields_in_developing_countries_1951-2004.png

You might get a bit more from GM and more mechanization but no doubling. 



Huskar said:


> Do you keep track of what has in fact happened where population has stopped growing eg Netherlands/Switzerland (I think from memory?)
> 
> V interesting tho thanks




Look at Japan. Italy may soon follow. What in particular are you interested in?


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## craft (25 March 2013)

Huskar said:


> Just curious as to why it is unsustainable apart from the law of large numbers (and who knows where this will in fact kick in)?
> 
> The same has been said for the last 100 years but yields keep increasing and new methods are found for growing crops in formerly barren lands.
> 
> ...




A finite earth can’t sustain an exponential population growth rate.   What can’t go on forever won’t.




Edit: Flying Fox beat me too it - with a bit more meat too.


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## Huskar (26 March 2013)

craft said:


> A finite earth can’t sustain an exponential population growth rate.   What can’t go on forever won’t.
> 
> View attachment 51471
> 
> ...




But that graph is fractal: no matter what time frame you put on it, it will look the same.

I think it is far better to look at it like that graph of the life of a turkey:




Flyfox thankyou for your answer, but I don't quite understand what you mean by nothing in nature fits an exponential. I would say what is in effect the opposite, nothing in nature fits a linear model. But perhaps I have read too much Taleb.

Very much an amateur in this area and happy to be shown up.


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## FlyingFox (26 March 2013)

Huskar said:


> But that graph is fractal: no matter what time frame you put on it, it will look the same.




True. But that is also an adequate description of a exponential. d/dx exp(x) = exp(x). Having said that, look at the late 19th to 20th century. Esp the late 20th century. We had a doubling of pop in about 50 yrs.



Huskar said:


> I think it is far better to look at it like that graph of the life of a turkey:
> 
> View attachment 51477




Mate you have no idea how almost right you are here. May just come to haunt you later on. More on that below....



Huskar said:


> Flyfox thankyou for your answer, but I don't quite understand what you mean by nothing in nature fits an exponential. I would say what is in effect the opposite, nothing in nature fits a linear model. But perhaps I have read too much Taleb.
> 
> Very much an amateur in this area and happy to be shown up.




You're right nothing fits a linear func but in any ecosystem with constrains you will never have exponential growth. 

Typically this is due to some sort of predator prey relationship and or disease outbreaks or just constrains on resources (Any major break through in energy production aside (and probably despite of), it is a fact that we have finite resources, not a conjecture). Since we have more or less conquered the first two, the later will put a lid on things. 

The first two scenarios typically increase death rates and decrease average life spans. The last one typically puts (voluntary?) constrains on birth rates etc; at least in modern human society. See this happening somewhere??

More on your turkey graph.....Instead of that, draw a reverse sigmoid at mean about 75 years. That is the "well-being" graph of a human. Not as dramatic but not very different to the turkey.....expect.....the mean adult lifespan is ~ 70-75 yrs. That means that any changes in birth rates are not really evidenced until about 75 yrs later.

Why do you think governments from developed countries are giving incentives to have more children?


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## Huskar (27 March 2013)

FlyingFox said:


> You're right nothing fits a linear func but in any ecosystem with constrains you will never have exponential growth.
> 
> Typically this is due to some sort of predator prey relationship and or disease outbreaks or just constrains on resources (Any major break through in energy production aside (and probably despite of), it is a fact that we have finite resources, not a conjecture). Since we have more or less conquered the first two, the later will put a lid on things.




We are way off topic here - but I find this analysis as as an ecosystem very compelling in systems far removed from nature eg the world wide web.

Read a fascinating book recently called "From Gutenberg to Zuckerberg" which I highly recommend. It tells you a lot about the web and the internet (which are different btw) that you thought you knew but you really didn't and how this system is best analysed by reference to a natural system.

Fits in nicely with chaos theory ideas of feedback, small changes in inputs etc. (If anyone is interested in chaos theory I recommend John Gribbin's Deep Simplicity)

I will stop blabbering but I enjoy playing with and trying to overlay these cross-disciplinary frameworks especially when it comes to the most diverse and fascinating system of all - the market!


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## FlyingFox (27 March 2013)

Huskar said:


> We are way off topic here - but I find this analysis as as an ecosystem very compelling in systems far removed from nature eg the world wide web.




Waaaaaaaayyyy off topic. Surprised we haven't been told off for it yet....But most systems are macroscopically governed by simple "rules" if you will. At it's base, economics can be explained by supply and demand etc. Then you have competitive and cooperative interactions like in Game theory etc. 



Huskar said:


> Read a fascinating book recently called "From Gutenberg to Zuckerberg" which I highly recommend. It tells you a lot about the web and the internet (which are different btw) that you thought you knew but you really didn't and how this system is best analysed by reference to a natural system.




I'll try and read it up. Makes sense as at the end of the internet and start of end of the web whichever way you want to look at it are humans....



Huskar said:


> Fits in nicely with chaos theory ideas of feedback, small changes in inputs etc. (If anyone is interested in chaos theory I recommend John Gribbin's Deep Simplicity)




True. I'll try to get hold of that book as well.



Huskar said:


> I will stop blabbering but I enjoy playing with and trying to overlay these cross-disciplinary frameworks especially when it comes to the most diverse and fascinating system of all - the market!




Nope, that would be the human brain....


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