102  •   The Intelligent Option Investor
Another case in which the normal profit range of a company may 
change is through improvements in productivity. And although improve-
ments to productivity can take a long time to play out, they can be ex-
tremely important. The reason for this is that even if a company is in a 
stage in which revenues do not grow very quickly, if profit margins are in-
creasing, profit that can flow to the owner(s) will grow at a faster rate than 
revenues. Y ou can see this very clearly in the following table:
Year 0 1 2 3 4 5 6 7 8 9 10
Revenues 
($)
1,234 1,271 1,309 1,348 1,389 1,431 1,473 1,518 1,563 1,610 1,658
Revenue 
growth (%)
— 3 3 3 3 3 3 3 3 3 3
OCP ($) 
4 432 445 497 485 514 544 560 637 625 708 746
OCP 
margin (%)
35 35 38 36 37 38 38 42 40 44 45
OCP 
growth 
rate (%)
— 3 12 –2 6 6 3 14 –2 13 5
Even though revenues grew by a constant 3 percent per year over this 
time, OCP margin (owner’s cash profit/revenues) increased from 35 to 
45 percent, and the compound annual growth in OCP was nearly twice 
that of revenue growth—at 6 percent.
Thinking back to the earlier discussion of the life cycle of a company, 
recall that the rate at which a company’s cash flows grew was a very important 
determinant of the value of the firm. The dynamic of a company with a rela-
tively slow-growing revenue line and an increasing profit margin is common. 
A typical scenario is that a company whose revenues have been increasing 
quickly may be more focused on meeting demand by any means possible rath-
er than in the most efficient way. As revenue growth slows, attention starts to 
turn to increasing the efficiency of the production processes. As that efficiency 
increases, so does the profit margin. As the profit margin increases, as long as 
the revenue line has some positive growth, profit growth will be even faster. 
This dynamic is worth keeping in mind when analyzing companies 
and in the next section, where I discuss the next driver of company value—
investment level and efficacy.