[Josh]

ROI is much more important than margins (gross profit). Infinite ROI's are possible when you minimize your initial investment to 0.

[pentupentropy]

ROI and profit margins are quite similar in nature. This statement is a little broadly based ... so much so as to imply ignorance.

Try telling IBM that profit margins mean nothing.

[jpomerenke]

Originally posted by Josh
ROI is much more important than margins (gross profit). Infinite ROI's are possible when you minimize your initial investment to 0.

Profit margins are one of the most important things in a business... what are you talking about?

[Josh]

First of all, this post was meant to be a response to a post I had found in the forum. This was my first post and I clicked the wrong button.

What I was trying to imply is that to an investor… your ROI is by far the most important factor. Gross margin is gross income divided by net sales, expressed as a percentage. Gross margin was what the YE member was referring to in the post, so I compared ROI to GM.

A $100,000/year return on a $10,000,000 investment is drastically different to the investor who fronted $10,000,000 cash to the investor who creatively purchased the investment with a significantly lower out of pocket cost, say $500,000. The return for the cash buyer is 10%, while the return for the creative buyer was 20%. In this case, the gross margin for the company may be the same in both scenarios, yet the ROI can change drastically.

Gross margin, as well as countless other factors are all very important in determining the risk and sustainability of an investment, but everything boils down to net income and ROI to the investor. Again, this post made little sense out by itself and it was meant to be a response to another post.

[Josh]

In my original post I had referred to gross profit, not gross margins. Gross profit is the same as gross income, and still fits the scenario above.

Gross income and ROI are usually positively related but its strength varies drastiacally by investment. ROI's for the same investment can vary with different purchasing methods, regardless of gross income. The most important factor to an investor is ROI.

[Josh]

In response to the first response by pentupentropy.

My original response referred to margins as gross profit, not profit margins.

Profit margin is net profit after taxes divided by sales for a given 12-month period, expressed as a percentage.

Gross profit is pre-tax net sales minus cost of sales, also called gross income.

To infer that profit margin and gross income are the same is to imply ignorance. Try telling IBM that profit margins are the same as gross income.

[Verberatum]

For an outside investor ROI is one of the most critical components, particularly over the long run. Strong and sustainable margins are just one of the key components that lead to a positive ROI. How much leverage is inherent in the firms capital structure (debt vs. equity) also greatly affects ROI.

While for an outside investor this is perhaps the most key component, it most likely is not for the lead entrepreneur. There are numerous opportunity costs associated with starting a new venture (for instance the salary you are giving up, monetary compensation for the risk you are taking above that salary, etc.

To sum it up, for an outside investor ROI is crucial, however, to the actual entrepreneur it really is just a small part of the picture.

[Josh]

agreed. But, the lead entrepreneur would still focus on ROI and net income much more heavily than gross income (as per my original post, gross income isn't much without a strong net income behind it.)

There are so many opportunity costs involved with becoming an entrepreneur it is difficult to quantify a true ROI to the individual as you mentioned. Many entrepreneurs get their start with financial help, be it an angel, bank, or family... all of which are outside investors. This makes projected ROI integral to financing and hence becoming an entrepreneur in the first place.