Saturday, January 9, 2016

Obscene Profit Center

For John, BLUFNot everyone works just because it is fun to drive a big black SUV.  Nothing to see here; just move along.

This item on corporate profits is actually almost a year old, being dated from April 2015, but it is still of some interest.  Corporate profits haven't changed that much in a year. The author of this item from the American Enterprise Institute is Professor Mark J. Perry, who is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus.  The title is "The public thinks the average company makes a 36% profit margin, which is about 5X too high"
How do the public’s estimates of corporate profit margins compare to reality? Not surprisingly they are off by a huge margin.  According to this Yahoo!Finance database for 212 different industries, the average profit margin for the most recent quarter was 7.5% and the median profit margin was 6.5% (see chart above). Interestingly, there wasn’t a single industry out of 212 that had a profit margin as high as 36% in the most recent quarter.  The industry “REIT-Diversified” had the highest profit margin at 33.5% followed by just one other industry – Wireless Communications at 30.9% – with a profit margin higher than 30%.

“Big Oil” companies (Major Integrated Oil and Gas) make a lot of profits, right?  Well, that industry had a below-average profit margin of 5.1% in the most recent quarter.  And evil Walmart only made a 3.1% profit margin in the most recent quarter (as I reported recently), which is less than half of the almost 7% average government take on retails sales in the form of state and local sales taxes.  Think about it – for every $100 in sales for Walmart, the state/local governments get an average of $6.88 in sales taxes (and as much $9.44 in Tennessee and $9.16 in Arizona, see data here), while Walmart gets only $3.10 in profits!

So, a 3.1% profit over hundreds of millions of dollars of sales seems to add up to a lot of money.  On the other hand, if instead of being Walmart that money was invested in bonds it would earn the same kind of return.  There is a point at which lack of profits means you don't bother to invest your money there.  Where is that magic point?

Hat tip to the InstaPundit.

Regards  —  Cliff

1 comment:

C R Krieger said...

We did get a comment, from someone on Deep Background

"Hedge funds?  And other abusers of the very few restrictions placed on Wall Street?"

While I agree that Hedge Fund Managers make an obscene profit, I am not sure the people on Wall Street feel unregulated.  Yes, Glass Steagall should be brought back, but on the other hand there is all the paperwork involved in Sarbanes-Oxley.

Maybe others have a thought.

Regards  —  Cliff