How much does the average American corporation make in profit?

How much profit does the average American corporation make?
How much profit does the average American corporation make?

A while back, there was a story about how Americans vastly overestimate how many people in the USA are homosexual. According to Gallup polls in 2011, Americans estimated that 25% of the people in America were homosexual. In 2015, it was 23%. The actual number is about 3%. So it’s very clear that Americans can have wildly inaccurate perceptions about reality. Why are Americans so wrong? I think it’s because they see a lot of gay people in high profile areas, particularly in the entertainment industry.

I thought about this failure to perceive reality when I saw a story about how much profit Americans think that corporations make. My guess was that the average corporation makes about 5-10% profit margin. I know this because I used to buy and sell stocks regularly and that’s one of the numbers I would look at. Most Americans own stocks, so I thought they most Americans would know the number as well. But it turns out that American perceptions of corporate profits are wildly off the mark.

Check out this article from the prestigious American Enterprise Institute:

When a random sample of American adults were asked the question “Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?” for the Reason-Rupe poll in May 2013, the average response was 36%! That response was very close to historical results from the polling organization ORC International polls for a slightly different, but related question: What percent profit on each dollar of sales do you think the average manufacturer makes after taxes? Responses to that question in 9 different polls between 1971 and 1987 ranged from 28% to 37% and averaged 31.6%.

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 NYU Stern database for more than 7,000 US companies (updated in January 2018) in many different industries, the average profit margin is 7.9% for all companies and 6.9% for more than 6,000 companies excluding financials (see chart above).

[…]“Big Oil” companies make a lot of profits, right? Well, that industry (Integrated Oil/Gas) had a below-average profit margin of 5.6% in the most recent period analyzed, and separately, the Production and Exploration Oil/Gas industry is losing money, reflected in a -6.6% profit margin. For the general retail sector, the average profit margin is only 2.3% and for the grocery and food retail industry, it’s even lower at only 1.6%. And evil Walmart only made a 2.1% profit margin in 2017 (first three quarters) which is less than the industry average for general retail, possibly because grocery sales now make up more than half of Walmart’s revenue and profit margins are lower on food than general retail.

Sometimes, the government makes MORE from the sale of goods or services than the company that does ALL the work:

Interestingly, Walmart’s profit margin of 2.1% is actually less than one-third of the 6.5% the average state/local government takes of each dollar of Walmart’s retail sales for sales taxes. Think about it – for every $100 in sales for Walmart, the state/local governments get an average of $6.50 in sales taxes (and as much as $10.12 in Louisiana and $9.45 in Tennessee, see data here), while Walmart gets only $2.10 in after-tax profits!

I think that Americans are getting their false anti-corporation views from listening to the mainstream media. The mainstream media is overwhelmingly leftist according to recent studies of their political donations. I think that the anti-corporate views of the average American comes from their uncritical consumption of mainstream media propaganda. They think they are getting objective news reporting, but what they’re really getting is socialist propaganda.

Here is a short little video that explains more about profit margins, and what would happen if a socialist like Bernie Sanders were put in charge of a corporation:

If you’d like to help with this problem of anti-business economic illiteracy, please watch the video and share it, or share the AEI article, which contains the video. America will be a better country when Americans have accurate, informed beliefs about important issues.

9 thoughts on “How much does the average American corporation make in profit?”

  1. This cannot be stressed enough. People tend to have this stupid perception that the rich are a kind villian who takes away from the poor and that economic growth is some kind of zero sum game (only in some cases it is).

    Not to mention that those most of those profits also go to paying the shareholders (many who are not rich themselfs) who invested their money in those companies and who are planning for retirement.

    They also happen to think that hard work makes them entitled to be successful, when it is inteligent work + effective work that makes people sucessful.

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  2. Observation of restaurant turn over should tell the intelligent observer that the profit margin can’t be very big.

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  3. I don’t know if it is like this in the US. But also businesses pay a higher rate for almost any utility. Getting business rate for power, phone systems is a fancy term for paying double the residential rate.

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  4. The high taxes are also why many small businesses close. Over time many people realize it is getting better to just work and make a wage. Then you don’t lose on a slow work day, you don’t have to hire a replacement out of your pocket. You don’t have to handle replacing employees when they suddenly quit.

    If there is no incentive to own a business then why put up with all the hassle. And meanwhile socialists answer by saying. If you can’t figure out a way to make money with out high tax then you shouldn’t be in business.

    I would say if socialists can’t figure out how to fool stuff with less money maybe they shouldn’t be in gov’t

    Liked by 1 person

  5. I got into an argument with a friend earlier today about CEO profits in particular. He has the “rich people are literally against Christ” mentality.

    When I tried to explain to him that CEO’s who make 30 million a year often bring their companies hundreds of billions in profits, he told me that it was immoral and I was unloving and didn’t have compassion for people making 10 dollars an hour.

    When I tried asking him how much a company -should- pay CEO’s, he told me he had no idea, but somehow knew 30 million was too much.

    When I suggested that paying less for a CEO would produce fractions of the wealth, giving much less money to everyone involved, he continued to call me unloving.

    When I proposed he read a book by an economist like Walter Williams or Thomas Sowell, he told me the Bible was all he needed to understand that rich people making millions of dollars are evil.

    Christians can’t afford to be this naive. But sadly, I think most are.

    Liked by 1 person

    1. Josh,

      “When I tried to explain to him that CEO’s who make 30 million a year often bring their companies hundreds of billions in profits, ….”

      Just what companies have hundreds of billions in profits in a given year? In my understanding, you’re off by nearly a factor of 10. Here are the top 3 most profitable companies in the Forbes 500 in 2016:

      Apple                          2016 Profits: $45.7 billion      % of Revenues (Margin): 21%
      J.P. Morgan Chase      2016 Profits: $24.7 billion      % of Revenues (Margin): 23%
      Berkshire Hathaway   2016 Profits: $24.1 billion      % of Revenues (Margin): 11%

      “When I tried asking him how much a company -should- pay CEO’s, he told me he had no idea, but somehow knew 30 million was too much.”

      How much should it be? Consider this fact: “While the 2016 CEO-to-worker compensation ratio of 271-to-1 is down from 299-to-1 in 2014 and 286-to-1 in 2015, it is still light years beyond the 20-to-1 ratio in 1965 and the 59-to-1 ratio in 1989.” Have company profits grown by this percentage? If not, then why should CEOs get paid these large amounts?

      “When I suggested that paying less for a CEO would produce fractions of the wealth, giving much less money to everyone involved, he continued to call me unloving.”

      Considering the inaccuracy I perceive above, you should understand why I ask this: What is the basis for your “suggestion” that “paying less for a CEO would produce factions of the wealth”? Wishful thinking? Believing the claims of the CEOs and company directors?

      As to the question of immorality of the pay to CEOs, I would ask if they are effectively oppressing the other employees in the company. I think there is a clear biblical principle that mistreatment of others is contrary to God’s will. So, if CEO pay is the result of such behavior, then it is ungodly. If not, then it is acceptable.

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  6. So, in the example you gave, let’s look at Walmart:
    https://finance.yahoo.com/quote/WMT/key-statistics/
    http://www.nasdaq.com/symbol/wmt/financials?query=income-statement

    So much information! What does it all mean? So yes, Walmart makes a lot of revenue (495.01B USD) and also “Gross profits” (124.62B). However, this doesn’t account for taxes, paying for debt (e.g., corporate bonds), depreciation (because buildings and equipment have to be depreciated — think of maintenance, repair, replacement), and amortization … or even things like R&D or salaries.

    The more interesting number is actually EBITDA (“Earnings Before Interest, Taxes, Depreciation, and Amortization”) = Net Profit + Interest + Taxes + Depreciation + Amortization [=32.86B USD]

    Or Profit Margin (2.31%)

    Or Operating Margin (4.51%)

    The AEI asked, “Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?” which is effectively “What is the Net Profit as a percentage of Sales [I assume that’s revenue]?” (which you can also get off the balance sheet)

    Basically that is ~= Net Income / Revenue. (And not every company is as profitable as say, FB [41.75% profit margin] or GOOG [20.09%] or AAPL [21.09%]) Even AMZN (1.20%) and NFLX (4.04%) are closer to the average.

    Yeah, yeah, so both finance and math are hard for many people.

    High taxes do make it difficult to (1) start a business as well as (2) continuing to do business.

    As to CEO salaries, some people should read what’s in their laws (and not just accept them to see what’s in them … sorry, couldn’t resist). For instance, https://www.congress.gov/bill/115th-congress/house-bill/1

    “The bill imposes an additional tax on taxpayers with adjusted gross income that exceeds $1 million ($1.2 million for married taxpayers filing jointly) by phasing out the benefit of the 12% tax bracket, as measured against the 39.6% bracket.”

    “Subtitle I–Compensation

    (Sec. 3801) This section modifies a provision that limits the deduction for compensation of covered employees of a publicly held corporation to salaries of no more than $1 million per year. The bill: (1) repeals the performance-based compensation and commission exceptions, (2) modifies the definition of “covered employee,” and (3) expands the definition of “publicly held corporation.”

    (Sec. 3802) This section imposes an excise tax on excess tax-exempt organization executive compensation. The tax is equal to 20% of the sum of: (1) any remuneration (other than an excess parachute payment) in excess of $1 million paid to a covered employee by an applicable tax-exempt organization for a taxable year, and (2) any excess parachute payment (separation pay), as specified in the bill.

    (Sec. 3803) This section allows qualified employees to elect to defer, for income tax purposes, income attributable to certain stock transferred to the employee by an employer.

    Employees are excluded if they: (1) are a 1% owner, the chief executive officer, or the chief financial officer of the corporation or have been at any time during the 10 preceding calendar years; (2) are a family member of the specified individuals; or (3) have been one of the four highest compensated officers of the corporation during any of the 10 preceding taxable years.”

    Basically, higher taxes for CEOs and highest compensated officers, including repeal of the exceptions for performance-based compensation and commission. [I do think CEOs should get some performance-based compensation, and what it looks like is this: a CEO might get a certain number of shares of the company, sometimes at a certain price. If the company does well, the stock price goes up. The CEO has a vested interest to help his or her company do well.]

    But wait, news really didn’t pick up on this because it didn’t fit their agenda. Instead, they pick up on factless sound bites like Bernie Sanders:

    “Mr. President, I have not the slightest doubt as I have said before, that after the Republicans pass this huge tax giveaway to the wealthy and large corporations, they will be back on the floor of the Senate. And when they come back, they’ll say, ‘oh, my goodness, the deficit is too high. We have got to cut social security, medicare, medicaid, education, and nutritional programs.’

    In other words, in order to give tax breaks to billionaires and to large, profitable corporation, they’re going to cut programs for the elderly, the children, working families of this country, and the poor. This legislation will go down in history as one of the worst, most unfair pieces of legislation ever passed. But I say to my Republican colleagues, as you saw on November 7, the American people are catching on.”

    ^^^ What is interesting is that I’ve looked through and then searched through the bill and can’t find anything that says cuts to social security, medicare, medicaid, education, and nutritional programs.

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  7. I am pro business. But I do believe there are some bad business practises encouraged by the stock market.

    Companies should be looking for a profitable balance over a series of years. And not evaluating a ceo over the last quarter or year.

    In that situation you would lose times when companies have to cut valuable parts of the company that are not profitable today to make a higher a stock value or dividend today. Even with knowledge that it will cause issues in the future

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