Business cost is Selling/General/Admin Expenses and Research and Development. The Business Cost to Gross Profit ratio must be less than 80% for the company to be a worthy investment. A ratio of is less than 30% is better. That means the company could have a Durable Competitive Advantage working in its favor. Typically, companies that have a Business Cost to Gross Profit ratio of less than 30% do not have any Research and Development costs.
Equations
Business Cost:
For a good company:
For a great company:
Example 1
For the year 2010 Coca-Cola spent $7.199 Billion on Selling/General/Admin Expenses and none on Research and Development. Their Gross Profit was $22.426 Billion.
Date: Year 2010
Company: Coca-Cola
Selling/General/Admin Expense: $7.199 Billion
Research and Development: $0
Gross Profit: $22.426 Billion
Coca-Cola's Business Cost to Gross Profit Ratio is less than 80% and very close to 30%. It doesn't spend anything on Research and Development because the beverage business doesn't change much. Coca-Cola makes the same products year after year for over 100 years. This company is very, very profitable.
Example 2
For the year 2011 IBM spent $22.865 Billion on Selling/General/Admin Expenses and $6.258 Billion on Research and Development. Their Gross Profit was $50.138 Billion.
Date: Year 2011
Company: IBM
Selling/General/Admin Expense: $22.865 Billion
Research and Development: $6.258
Gross Profit: $50.138 Billion
IBM's Business Cost to Gross Profit Ratio is less than 80%. They are the largest computer services company and spend little on Research and Development compared to their competitors. IBM is also very profitable.
Example 3
General Motors, an American car manufacturer, spent $15.959 Billion on Selling/General/Admin Expenses in 2007 and none on Research and Development. Their Gross Profit for that year was $12.021 Billion.
Date: Year 2007
Company: General Motors
Selling/General/Admin Expense: $15.959 Billion
Research and Development: $0
Gross Profit: $12.021 Billion
General Motors' Business Cost to Gross Profit Ratio was 132%! Way over the threshold of 80%. They were spending more money than they were making. Two years later, in the year 2009, General Motors filed for bankruptcy.