Operating Margins

https://www.bloomberg.com/opinion/newsletters/2025-11-13/bla...

https://i.xkqr.org/medianvsmeanmargin.png

Though I do recommend exploring the plot on a full-size monitor too – it's zoomable etc.

    > Appendix

    > The by-category margins are repeated in this table.

I held my phone sideways

Income is what you sit with after all the expenses and taxes have been deducted from the retail price.

Let's say you create some product, XYZ, which takes you exactly 5 hours to make. The materials to make the product costs you $50, the salary costs $100 ($20/hr * 5 hours), the shop costs (rent, utilities, etc.) costs roughly $5 pr product. And the things involved in selling your product (marketing, etc.) costs you $45 pr. product.

So in order to break even, you need to charge $50 + $100 + $5 + $45 = $200

You decide to sell the product for $250.

So before taxes you've earned $250 - $200 = $50

And let's say you have to pay 10% taxes on that, so 10% off $50 = $5

Your shop is left with $45 for each product they sell. Or you have $45 in income.

Your operating margins would be $45 / $250 = 18%

I found different definitions, but it seems net profit = net income.

There is gross income, which is roughly sales (revenue) minus the direct costs of those sales. There is net income, which is the money left over after also accounting for other costs, like fixed overheads and marketing.

> For some volume of sales that comes into the business, it gives an idea of what percentage is left as cash in the end.

Revenue = The total value of goods or services a company sells during a particular accounting period.

Gross Margin = The difference between revenue and the cost of goods sold. Also called Gross Profit.

Net Income = A corporation’s net earnings or “bottom line.” Net income is the residual of revenues after cost of goods sold, operating expenses, depreciation, interest, and taxes are considered.

Operating Expense = Expenses incurred in conducting normal business operations. Operating expenses may include wages and salaries, employee benefits, administrative expenses, research and development costs, and other similar expenses.

It being a weighted average does sound like a reasonable explanation, though. A median of 0.29 and weighted mean of 0.82 is trivially possible given e.g. values (0.29, 0.29, 0.82) and weights (0, 0, 1).

It lowers the profit of a public company, thus decreasing pressures to pay a dividend, while the consultancy leeches money and pays it forward to some other company in which the public company’s founders/executives are direct beneficiaries.

Op margins are a great way to think about where one might see mean reversion, which then flows to net.

Ie are there structural reasons for the op income or is it a maturing sector which will attract new entrants.

But the alternative, trading dollars for dollars, is essentially just arbitrage, which tends to disappear from competition. Organic marketing is the only sustainable source of alpha I’ve found in affiliate marketing.

HTML looks pretty handwritten (lack of crazy css classes and simple structure)

<link rel="stylesheet" href="https://fi-le.net/css/tufte.css">

They are using tufte.css https://edwardtufte.github.io/tufte-css/

That's what private equity loves.

There's probably some meta commentary on the global risk climate in general since COVID here.

Of course, this pretty closely matches the basic Econ 101 explanations of competition and free markets. The entire goal of competition is to reduce prices, specifically to get the market price of a good to trend down towards the marginal cost. The thing that's supposed to be good for society isn't that some people get very rich by selling things at high profit margins, but rather that the stuff we want is available at the lowest feasible price.

OK, I'll bite. This is a very ungenerous take. Entities that aggregate and provide capital create enormous real human value. In fact, I would argue that most of the improvement in modern life that we all take for granted is because capital markets are available and accessible at scale. Where does the biotech company working on the new gene therapy get the billions it takes to develop and bring that drug to market? Where does the aircraft leasing company get the money to pony up for aircraft at hundreds of millions a pop?

I think it is fair to argue about whether the financial services use their position fairly/wisely/etc but it is unfair to dismiss the industry as "middlement using other people's money to extract wealth".

While these are bogeymen, they do provide clear services that people need.

Banks should be obvious. A toll road is the worst offender in the list, it's tough to justify the eternal regressive tax.

The rest falls into financial markets. A steelman argument here could be that those services all make the power of compound interest broadly available. It's maybe the only exponential power available to average people.

I think there's a good argument that financial markets are a big reason that people can ever retire.

You're missing how the calculation works.

Suppose you work in a lab doing genomics etc. You get paid, say, $100,000/year, and you require some equipment which costs another $100,000/year to pay off and which goes to pay the salaries of the people who invented or manufactured it. Then your lab has $210,000/year in revenue, which means $10,000 in profit and a margin of ~5%, which isn't super high.

That's good! It means the people paying for your services aren't paying a huge margin on top of your salary to receive your services so more people can afford it. Or it means you're getting paid $100,000 instead of $60,000, the latter of which would have quintupled the investors' profit but reduced your incentive to do that work, reducing the quality of the people they can attract to do it.

Whereas industries with high net margins are the ones that are the most dysfunctional or captured by incumbents. It's no surprise that all the finance stuff is there at the top since that's the most thoroughly captured industry in the country. But that doesn't mean you want other things to be like that, it means you want those things to be more competitive so the money is going to customers as lower prices or workers as higher wages instead of going to fat cats as higher margins.

Article says Unit Economies or regulatory monopoly, but I'd be interested in something that goes deeper, specifically around financial services.

I learned advanced engineering topics only to find that the “hot” areas were social media and cell phones.

Not sure what, but always assumed there would be better uses of such an education.

I was largely mistaken.

Every day is a new chance to re-examine what you most care about and make some surprising discoveries.

Or not :)

This is an absolutely insane take. If you truly believe it, then I propose two tests:

1. You should start a business that provides the same services without rent seeking. If they’re really these low-value things that are just charging high prices, then you should be able to setup very attractive alternatives, make a ton of money yourself, and improve the world in a big way.

2. If you don’t have the energy or willingness to start them yourself, you could limit your use of them to the absolute bare necessity. If you believe they extract value, you could probably do better for yourself by using them less.

Critically, all the revenue for things you mention have yet to materialize, so they will show up in this naive analysis as losers. What they really represent is _opportunity_. Some may materialize but others have been around for decades and it turns out the "application for profit" step is much harder than anticipated.

> margin (profit) is inversely correlated with value to humanity.

You say this like it's a bad thing, but arguably the most valuable things to humanity are food, water, and shelter. These are simultaneously so important and so cheap that they embody the term "commodity," and that's a good thing! A _ton_ of human ingenuity from every society and culture has been applied to making these things better and cheaper and more plentiful. The same thing is happening to solar power (mostly for geopolitical reasons), which is conspicuously not on either of your lists.

Shelter is the one bit in the hierarchy of needs that got weird. Since it's not a consumable, there's incentive to treat it as an investment. In theory there's nothing wrong with that, but the incentives combined with local politics can become toxic. So many voters in the US own real estate (with leverage!) that everyone agrees by default that prices must never go down. That leads to a trap where politics revolve around housing prices never falling.

9th from the bottom is EV charging. You might think that's going to improve quality of life, but the reality is these are companies trying to be middle men in a commodity market. They want to profit from delivering electricity to locations along the highway. It's kind of stupid because most people can charge at home overnight and be good for the next day or three. OTOH if you're going on a long trip you'll want to plan stops at these places but since you're planning you can check prices too.