How do you measure profitability? I’ve assiduously stayed from the health care controversy that has dominated the news headlines in the United States for the last calendar year, since everyone involved with it seems to come out of it looking worse for the wear. However, there is one aspect of the debate that I have found amazing, revolving around how profitable or unprofitable the health treatment business is for insurers, pharmaceutical firms, and hospitals.

Let me be clear up front, though. This is not a post about health care reform but about how far better measure profitability. On one part of the issue, you have proponents of health care reform arguing that health-care companies, generally, and health insurance providers, specifically, make huge earnings.

By extension, in addition they suggest that one of many ways to reduce healthcare costs is to reduce these profits. On the far side of the issue, you have competitors of healthcare reform noting that health care firms really fall in the lower rung of the market in conditions of profitability.

Each aspect uses its own measure of success to make its point. 1. Dollar income: For the surprise value, there is certainly nothing better than dollar revenue. 100 billion in income seems awe inspiring. In ’09 2009, the aggregate amounts (in billions) for publicly traded firms in the health care business were the following.

In terms of dollar profits, pharmaceutical companies deliver much higher profits than other parts of the health care business. 3.5 billion. In terms of net revenue, pharmaceutical firms account for almost 14% of the web profits for the whole market. The nagging problem with buck income is that they have no moorings.

2. Income: We are able to scale profits to total earnings. Looking at collateral investors in firms, the most logical measure is net profit percentage, obtained by dividing the world wide web income by total sales. From the perspective of most state holders in the firm, a far more complete measure is the working margin, estimated by dividing working profits by income.

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The second option is less inclined to be skewed by funding decisions. After all, a firm that borrows more will have less net income after interest expenditures and a lower net margin. Taking a look at the health treatment business again, are the numbers here. While pharmaceutical firms deliver higher margins than the market, the rest of the health care business delivers margins in line with the market. I personally do not find income, by themselves, to be particularly informative and here’s why. As every introductory marketing book points out, there’s a trade off between margins and turnover.

In other words, you can set high prices (and high margins) and sell less or go for lower prices and higher sales. In retailing, for example, both strategies are seen by you at play. Walmart has low margins but uses its turnover ratio (measured as sales as a percent of capital) to finish up with huge profits.

Many luxury suppliers have higher margins than Walmart but battle to the survey even meager profits. More generally, distinctions in the manner business is conducted helps it is impossible to compare margins across businesses. 3. Returns on investment: In my view, the only success measure that works across areas is to gauge the return generated on a dollar committed to a business.

In my view, this table provides the most extensive way of measuring the success of every business. Pharmaceutical companies and health insurance companies generate returns significantly greater than their costs of equity and capital and in accordance with the market. I am not suggesting that comes back on capital and equity are perfect. Of every year I do update all of these profitability measures on my website at the start. Health care firms, at least in the aggregate, are financially healthy and generate returns on the investments that exceed their costs of equity (capital).