No. of Recommendations: 15
Profits can rise faster than sales if RoS keeps rising.
Intuitively, more modern firms have a higher net margin than the older firms...Yes, net margins have risen. But they can't *keep* rising.
The intuition doesn't hold water for me.
There might well be a case that many firms have higher returns on
assets than before (a few very large firms are asset light and extraordinarily profitable, though that doesn't seem to apply much to most firms).
But a higher return on assets doesn't equate to higher returns on sales across the economy.
There is only so much money in the economy, which is basically measured by sales, and only so much of that can end up in companies' coffers.
Net profit margins wander around. Beyond the business cycle, there are low stretches (e.g. 1983-1993) and high stretches (e.g. 2010-2020), depending on the share of GDP going to pesky things like employees, taxes, real interest rates, energy and raw materials, and non-domestic suppliers of goods or services.
In the US, the labour share of income has fallen a lot in recent years, and the government and bondholders haven't done that well either, so net margins are near their historical highs.
But that has a limit.
Consequently it can't be extrapolated. Net profit margins over the very long run are bound to a range.
They can certainly never exceed sales, and (probably) never even exceed maybe a third of sales. Probably not even a fifth.
And they can't stay below zero for any length of time without calling into question the entire concept of for-profit companies.
So, yes, profits have grown a lot faster than sales for a while.
But this has to halt at some point. If not immediately, then probably not at a level much higher than this given the historical range.
The lowest level in recent years is above the highest level seen in the prior decades.
They might stay at quite elevated levels, or they might fall back to what used to be considered normal. Other than a predictable dip during recessions, I have no idea.
But there is no structural or logical reason to think they can continue to rise for any length of time.
Absent any better information, if I had to make a guess I start with the notion that the average figure for the coming 5-20 years will fall back to a point halfway between the recent observations and the old normal range.
Here's a chart you can try to eyeball.
https://fred.stlouisfed.org/graph/?g=cShMaybe around 8.5% - 9% sounds like a reasonable guess without much pessimism? In between the old highs (when normal was low) and the recent lows (when normal was high).
Jim
