See: Profitability Index.
We'll get to the actual rule in a second. But be warned: it's a rule of thumb that will seem pretty obvious. Like, in the same category as "don’t stick needles in your eye" or "don’t take a nap on a busy highway."
The profitability index rule states that you shouldn't put money into a project with a profitability index figure of less than 1.0. The rule works because a reading of less than 1.0 on the profitability index means a project isn't profitable.
To put it another way, if you get a reading below 1.0 on the profitability index, it means that, according to all your current information, investing in that venture will lose money. So, uh...don't put your money there. Find something else...something with a profitability index reading of more than 1.0. In other words, invest your cash in something that will make money. Ever see David Letterman's Stupid Pet Tricks segments? Well, this is that...for accountants and investors.
And, oh yeah, don't nap on a busy highway or stick a needle in your eye. Sheesh, do we have to tell you everything?
Related or Semi-related Video
Finance: What are operating profits, net...59 Views
finance a la shmoop.what are gross profits operating profits and net
profits? well the greatest fishing company that walks the earth or swims
the ocean made a fortune last year from selling nets. catching things like well [fish is caught from the ocean]
me. but that's really a different thing and no Bueno. leave us alone. in an
accounting sense net profits come after operating profits that come after gross
profits .and the net thing is well pretty much taxes. so here's an income statement
yeah yeah revenues and then there's the cost of the stuff you're selling. okay
fine. we'll note the nets only cost a little bit to make and you sell them for
a fortune .way overpriced if you ask me. like whatever happened to line fishing
anyway lazy humans. so you have your revenues then your cost of goods sold.
all right well if you subtract those cogs from the revs you get your gross [income statement pictured]
profits. yeah gross just gross and sad frankly like why not eat more chicken
seriously. anyway .so then you have your costs of operating the business you know
overhead. secretaries and insurance and rent and fish-smell deodorizer. and then
you have operating profits after you subtract. them yep you subtract those
right from gross profits. get operating. so you made some number let's call it 10
million bucks why not .you know how many of my brethren died to give you that
money right? blood money. talk to Leo to see about it.
maybe he'll make a movie . anyway let's say the tax rates 30% well you'd pay 3
million in taxes on that 10 million of operating profit to then have net
profits of seven million dollars. lots of profits .there people. yeah hope you can [equation]
sleep at night.
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