Profitability vs Profit Case

Private Equity profit profitability
New answer on Jan 23, 2020
3 Answers
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Niklas asked on Jan 22, 2020

Dear Community,

I have one question regarding profitability and/or profit cases (where profitability or profits are declining): Should I choose a different approach when doing a profit instead of a profitability case? The underlying reasons can be the same but one metric is absolute and the other one is relative. Moreover, profits can increase when profitability is declining. Is it only good to know the difference or does it affect the structure?

Normally, I start by splitting profit into the components of revenue and costs and further analyze the different aspects of it. Should this approach be different for a profitability case?

Thank you very much!

Best,
Niklas

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Sidi
Expert
updated an answer on Jan 22, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers

Hi!

Here is how to be rigorous in your thinking:

  1. You need to ALWAYS define your focus metric! Profitability is not universally defined. It is usually profit relative to something (mostly profit/revenue, but can also be profit/cost, profit/customer base or dozens of other versions). Clarifying what profitability means for this particular client is your duty as consultant (candidate).
  2. Then you need to deconstruct this focus metric into its components and check, which one has changed in the direction wthat would cause the term to decline (nominator must have increased relatively to the denominator!). Then you drill deeper to isolate the numerical driver of this unfavorable change.
  3. Once you know what is mathematically driving the decline in profitability, then you start asking qualitative questions to understand the underlying reasons for this decline.
  4. After you understand the problem driver(s) and the underlying reasons, you are well equipped to outline strategic options to adress these very reasons.

Hope this is helpful.

Cheers, Sidi

(edited)

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Francesco
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Content Creator
replied on Jan 23, 2020
#1 Expert for Coaching Sessions (3.600+) | 1.300+ Reviews with 100% Recommendation Rate | Ex BCG | 8+ Years of Coaching

Hi Niklas,

while profits is always Revenues-Costs, profitability may be interpreted differently, in particular according to the denominator that you are considering. Most of the time profitability is (Revenues-Costs)/Revenues, but sometimes there may be differences. As a consequence, in a profitability case, compared to a profit one, you should:

  1. Clearly define what the interviewer means for profitability
  2. Analyze the related metrics to identify which component changed compared to the past. Most of the time these will be Revenues and Costs, but as mentioned could be different

The rest of the analysis will be the standard one for a profitability case.

Best,

Francesco

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Vlad
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replied on Jan 22, 2020
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

Whenever you have a case, you should be thinking of three things:

  • How is the case similar to what I've done before
  • How it is different?
  • How should I address the difference in my structure / clarifying questions?

It can be a case about the profit, but can have different nuances (and it will not necessarily be declining profits):

  • Profit can be lower than planned
  • Profit can be lower than the competitors
  • Profitability issue

How should you address it?

  • You can ask a clarifying question (E.g. for profitability question you can ask: was there a profit decline as well?)
  • Adress it in your structure (e.g. for profits lower than planned you can have a separate bucket called "Plan" and ask if the assumptions / approach changed)
  • By asking the right questions (e.g. for profits lower than the competitors, you should be comparing revenues and costs with the competitors instead of analyzing the trend)

Best

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Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers
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