For instance, some interesting companies have 20-25% net profit margins. And an exceptional business like Visa has 50% net profit margins.
Imagine that you have a business and when you sell one unit of your merchandise, you get a 50% profit. Wouldn’t it be great? You’ll get profitability much quicker with that type of business than with a business like Ross Stores for which net profit margins are around 10%.
At the bottom of the scale, just before churches and non-profit organizations, you’ll find Costco with 2% net profit margins. And even with these ultra low margins, Costco still makes money. And every shop is always full.
As an investor, Costco doesn’t grow enough for me. It’s valuation is also very high. Nonetheless, their ROE is around 20 which is incredible for such a low margin business.
I think that it’s the business I respect the most, from an investor perspective. Not my favorite business model, but probably the best managers in the world. Who I am to say that? Well, getting such small profits (mostly membership) and building such an empire where everybody goes is, to me, the incarnation of skill and intelligence.