Posted on 06/03/2019 7:12:54 AM PDT by Yardstick
I find this totally fascinating, though not completely unexpected. 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’s 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 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!
Bottom Line: The public’s complete overestimation of how much companies earn in profits as a share of sales explains a lot. If $36 of every $100 in sales at a company like Walmart, McDonald’s, Home Depot, Ford Motor Company or a local dry cleaner or restaurant really did turn into profits, then of course those companies could afford to pay unrealistic living wages of $15 per hour, accept unreasonable demands from labor unions, provide all sorts of generous fringe benefits including weeks of paid holidays, long paid maternity leaves, and gold-plated pension programs, etc. The public that believes in the fantasy-world of sky-high 36% profit margins would naturally think companies are just being greedy and stingy when they don’t pay higher “living wages” and have to be forced to do so through minimum wage, or living wage, legislation.
If the average person could realize that a 36% profit margin isn’t even close to reality, and that the typical, median firm has a profit margin of only 6.5%, or almost 30 percentage points below what the public thinks is a normal profit margin, then hopefully the average person would become a little more realistic about how the business world operates. Companies aren’t being stingy when they pay competitive wages, they’re just trying to survive on what are sometimes razor-thin profit margins, in a competitive environment where there’s not a large margin of error. If they’re not operating efficiently and watching costs very carefully, it’s pretty easy for a business to go from a 6.5% profit margin to a 0% break-even situation, and then to losses and bankruptcy — just look at the more than half a million businesses that fail every year.
The average person is also now a public school-indoctrinated collectivist moron
I don’t doubt this. This is all they have been told in school or by the media. Why would they think anything else?
That’s what I learned at Temple U.
Profit about 7%.
2015 Article … but I suspect, still pretty accurate. The point is…. The NEA failed AGAIN and the MSM succeeded AGAIN!!
“Average people” who have never owned a business or been responsible for a P&L.
Even with a profit, return on investment can still suck.
Grocery stores have among the slimmest profits out here.
Tax prep and bookkeeping are among the highest profit.
What is the number for Apple?
Yep, and as the writer points out, it makes people susceptible to supporting burdensome taxes and regs on business because they imagine there’s lots of cushion.
A company making between 7 and 10 percent is doing okay, 17 percent is ideal.
I’ve always said these people should hate UNIVERSITIES more than corporations.
At least Corps. add to the well-being of the masses.
How about this? Who makes more money on the sale of gasoline, evil money-grubbing oil companies, or the government?
And the Marxist universities
tell them to hate corporations.
I’m a bit surprised that the average person doesn’t think they average 473% profit.
The number of people I know who are convinced that “investors\businessmen(women), etc” have a “secret stash (Uncle Scrooge-style)” in their basement or otherwise squirreled away is frightening! I know some supposedly well-educated people who thinks this!
Economic & business ignorance in this country is overwhelming. No wonder “Romney’s 47%” is correct number.
ML/NJ
I know somebody who runs a bookkeeping business. She works on her own running it out of her house. Her main expense is for office supplies. She has no employees, or office rent to pay in an office building.
It sure seems that most people are clueless about profit margins, or the various expenses involved in running a business.
My company would be quite happy to see 7%. Our CEO often says to us, “you know we are supposed to be a for profit company.”
Our employees, competitors, suppliers, and governments all notice if our profits get out of line and corrections follow.
"Typical business" is of course a big fudge factor. It would be interesting to disaggregate it and ask people about specific sectors. Or to categorize businesses by degrees of risk. Or by essentiality of the product or service provided. Or by the intensity of regulation.
I'd be particularly interested in what figure people chose for "businesses that enjoy monopoly status by virtue of government regulations or licenses." Or words to that effect to characterize the radio and tv industry license to exclusive use of designated bandwidths. One of my humble proposals over the years has been to put broadcast licenses up for auction every five years. Or even better, take each broadcast license (i.e., the exclusive use of a designated bandwidth) and open it up to an annual lottery in which every U.S. citizen would be automatically entered. Hey -- the bandwidth belongs to us, not to the broadcasters. Let the broadcasters buy it from the lottery winners, subject to whatever usage restrictions the winner wishes to impose.
I’m not surprised by this. It’s what the people have learned from the MSM.
OTOH, the author of the article plays way to loose with the term “profit margin”, That term is normally used to specify the markup of goods sold from the the cost of those goods. Or something similar.
Bottom line profit is what counts. What counts even more is “cash flow”. Good accountants and tax attorneys can help push your taxable profit down and your cash flow up.
In the end it is consistent after taxes cash flow that determines the financial health of a company.
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