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Understand Profit Mechanics

In: Beating Inflation

Author

Listed:
  • Hermann Simon

    (Simon-Kucher & Partners)

  • Adam Echter

    (Simon-Kucher & Partners)

Abstract

With the onset of inflation, profit defense becomes a high priority. We understand profit to be only the amount of revenue the company can keep after all obligations have been met, i.e. net profit. EBIT and EBITDA are not profit in this sense. In inflation, the distinction between nominal and real profit is crucial. Ultimately, the aim should be to defend real profit. Money illusion is to be avoided. Phantom profits arise because depreciation is based on historical procurement values. These phantom profits are taxable, leaving a financing gap for new investments in fixed assets. The profit situation of companies varies widely across countries and industries reflecting differences in risk and cost of capital. American companies achieve a net profit margin of around 5 percent. This margin provides a rather thin buffer against the effects of inflation. Defending real profit becomes very difficult at inflation rates of 8 percent or more.

Suggested Citation

  • Hermann Simon & Adam Echter, 2023. "Understand Profit Mechanics," Springer Books, in: Beating Inflation, chapter 4, pages 29-35, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-20093-9_4
    DOI: 10.1007/978-3-031-20093-9_4
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