“Now, does anybody think that ExxonMobil needs some extra money, when they”re making money every time you go to the pump? Why wouldn”t we want to eliminate that? Why wouldn”t we eliminate tax breaks for corporate jets? My attitude is, if you got a corporate jet, you can probably afford to pay full freight, not get a special break for it.”
Barack Obama, October 3, 2012
After watching last night’s debate, I noted a variety of topics I could blog about regarding tax policy, the debt and deficit and entitlement reform. But before I cover any of that, which I plan on doing
in a few upcoming blog posts, let’s talk about profit margins.
Many companies are villified by politicians for their billions in profits, but oil companies have really become the fall guy for what is wrong with the economy. The “blame Exxon” mentality is nothing short of political and peculiar. When President Obama mentioned Exxon and their “extra money” (as in why they should not be given any special tax breaks), he was misleading at best. In addition, Mitt Romney missed an opportunity to explain basic business economics. Having been around the corporate world a time or two, he should have capitalized on this oft-repeated accusation about Big Oil.
When looking at a firm’s financial statement, it is important to differentiate between profit and profit margin. Profit is the amount of money a company earns after subtracting expenditures. For large firms, this number could be in the tens of millions, hundreds of millions or even billions of dollars. Because this dollar amount is relatively large compared to average household earnings, politicians seem to enjoy tossing it around like the salmon at Pike Place Market. It shocks and awes the middle-income taxpayer and makes one think that large corporations are greedy.
But something is fishy here. The real question is, how much does a firm spend to earn profits? The profit margin is the amount of profit earned per dollar of expenditures, or net income divided by total revenue. For instance, if a firm has a profit margin of 43 percent, it means that they earn 43 cents in profit for every dollar of expenditures. In other words, when firms are earning profits that seem excessive to many politicians, they are also spending and investing to get those profits. Thus, faulting a firm for having billions of dollars in profits is disingenuous without knowing what their profit margin is.
Compare profit margins for the following companies in their most recent quarterly reports.
Exxon Mobil 12.49% as of June 30, 2012
Walmart 3.51% as of July 31, 2012
Bank of America 7.94% as of June 30, 2012
Apple 25.19% as of June 30, 2012
United Health 24.32% as of June
Microsoft -2.72% as of June 30. 2012
AT&T 12.36% as of June 30, 2012
This is just an example of a few major firms (some of which have become favorite punching bags of the ruling elite), but Exxon ranks third. Moreover, this is just their most recent quarterly results. Firms’ profit margins change each quarter, and sometimes dramatically. Bank of America’s profit margin was only 1.22% during the first quarter 2012. A year ago (June 2011) Exxon’s had fallen to 8.51%. Microsoft, which was in the red during the its most recent quarter, had a profit margin of more than 31 percent during the last quarter of 2011.
Thus, faulting a firm for having billions of dollars in profits is disingenuous without knowing what their profit margin is. Even if policymakers stopped their obsession with profits and started fingerpointing at profit margins, who decides what is excessive? Whether industries should receive certain tax breaks that are not given to other industries is a matter for thoughtful and intelligent debate, but it’s time to stop beating up on companies for doing what they should be doing: maximizing profits