How to Measure Corporate America’s Huge Profits
Submitted by Hilpan Moxie Wealth Management, Inc. on August 31st, 2015Buried inside economic data, the government gives us ten ways to show how well corporate America is doing.
The Commerce Department generates 10 quarterly measures of business income and related components. All are seasonally adjusted at annual rates.
Here’s how they differ, and why they matter:
Corporate profits with inventory valuation and capital consumption adjustments. Commerce analysts call it their “featured number.” They’re proud of it because it most closely aligns corporate income with changes in GDP. Adjusting for inventory valuation strips out any gains or losses recorded because oil in a storage tank became more valuable or televisions in warehouse were discounted. Adjusting for capital consumption puts depreciation among businesses on a level playing field, stripping out industry-specific accounting differences or changes in the law that allow for quicker write-offs. With the adjustments, the number measures the profit or loss recorded on what was produced that quarter. This current production figure is then comparable to changes in GDP, which measures all output in the economy.
Taxes on corporate income. This gives a view of the share of profits that goes to governments. Pretty straightforward, except Commerce analysts caution that due to data-collection differences, the numbers don’t align with separate Internal Revenue Service calculations.
Profits after tax with inventory valuation and capital consumption adjustments. Commerce analysts say this number, the featured figure minus taxes, seems to be the most frequently reported in the media. It’s the business equivalent of take-home pay and therefore the most meaningful to Wall Street.
Net dividends. The cumulative profits dispersed to shareholders. Typically these are investors, but the amount also includes dividends paid to governments. That was once a very small fraction, until the federal government began collecting billions in dividends from bailed-out institutions during the financial crisis.
Undistributed profits with inventory valuation and capital consumption adjustments. That mouthful is what accountants call retained earnings. It matters because it shows the funds available for businesses to reinvest in themselves, including by hiring and buying property.
Net cash flow with inventory valuation adjustment. The measure gives a sense of liquidity across corporations. A cash-flow expansion suggests increasing business activity.
Consumption of fixed capital. Measures how businesses are using up their assets, such as plants and equipment.
Capital transfers paid. These are non-dividend payments to governments and non-corporate businesses, such as partnerships. This cash outflow is often a result of litigation. Transfers between two corporations are not recorded because they net out in the economy-wide numbers.
Profits BEFORE tax (without inventory valuation and capital consumption adjustments). This reflects what companies collectively report on their tax returns, more closely following accounting rules than economic growth calculations.
Profits AFTER tax (without inventory valuation and capital consumption adjustments). This is the real-world number. Businesses actually do pay taxes and must account for their unique depreciation and changes in inventory value. This number best aligns with corporate earnings statements. It accounts for all corporations, including publicly traded firms and privately held companies.