minimal (~10%)

Today, I analyzed the 500 companies on the S&P 500 to quantify and

qualify the index's metrics. Moreover, I also wanted to discern the

weighted average gross margins, the weighted average pretax margins,

as well as the weighted post tax margins (i.e. weighted net profit

margins). Finally, I would also like to calculate the tax rate of the

average S&P 500 company based on the differential of the weighted

average pretax margins and the weighted average profit margins.

Here are my abbreviations that I¡¦m using:

S = Sales (i.e. Revenue)

COGS = Cost of goods sold

WAGM = Weighted Average Gross Margin

CSGADAI = Cost of Selling, General Administrative, Depreciation,

Amortization, and Interest -„³ Basically, this is all costs excluding

the COGS and Taxes. All these costs are deducted from revenue, just

like the COGS, to arrive at the Net Income (NI).

WAPTM = Weighted Average Pre-Tax Margin

COT = Cost of Taxes

WANPM = Weighted Average Net Profit Margin

NI = Net Income (i.e. Profit)

Regarding my liberal use of the term ¡§Weighted Average¡¨ for my

calculations as opposed to the ¡§Arithmetic Average¡¨: To understand

this distinction, let¡¦s analyze the WANPM. The WANPM is calculated by

summing the entire column of MS Excel which has the earnings of the

companies. Note that some of the values maybe negative indicating a

loss. The Earnings for each company is in Column E, and the Sales

figures for each company is in Column J. Therefore, the WANPM is:

=SUM(E2:E501)/SUM(J2:J501)

Also, this method is more robust than simply averaging all the

individual profit margins. As a comparison, the WANPM and the

Arithmetic NPM are: 0.04924734 and 0.074364, respectively.

Using this WA approach, I figured out that the WAGM of the companies

are:

WAGM - WeightedGrossMargin 0.2739

WAPTM - WeightedPreTaxMargin 0.0728

WANPM - WeightedNetProfitMargin 0.0492

Therefore, the Income Statement for a representative company on the

S&P 500 can be recreated who nominal revenue is $1. We have the

following Income Statement, and at the end, we will solve the average

tax rate for the representative company:

S 1.0000

(COGS) (0.7261)

WAGM ¡V WeightedAverageGrossMargin 0.2739

(CSGADAI) (0.2011)

WAPTM - WeightedAveragePreTaxMargin 0.0728

(COT) (0.0236)

----------------------------------------------------------------------------------------------

WANPM - WeightedAverageNetProfitMargin 0.0492

From a WAPTM of 0.0728, the company pays out 0.0236 in taxes. This

implies that the average company pays 0.0236/0.0728=32.4% in corporate

taxes.

Some insights that I¡¦d like to point out here is that the cost of the

employees (i.e. the wages) is actually very small when compared to the

other costs. The wages, which are a component of the CSGADAI, should

only be about half of this entire figure, which would mean half of

0.2011, or about .10 the total revenues of a company. On the other

hand, the COGS is .73. Therefore, it is not so valid to state that

the wage costs or the tax costs are the biggest costs of a

corporation.

Regarding taxes: The corporation only pays 2.4% of their total

REVENUES, on average. This is still 32.4% of their Pre-Tax Income.

I¡¦m not saying that this low tax rate is fair/unfair, but we should

definitely think about this and make our own insights.

Regarding the average P/E, P/B, P/S, P/CF, and ROE on the S&P 500,

here are the weighted averages:

P/E 14.59230769

P/B 1.449210896

P/CF 5.948592645

P/S 0.718632308

ROE 0.099313346

Note that the WANPM can be deduced from these figures as simply being

the P/E / P/S = 0.0492. Similarly, the ROE can be deduced by P/B

*/ P/*

E = 0.0993, which is also in accordance with my values above.

However, only 487 of the 500 companies have reported their book

values, so this value only takes into account the 487 which have

reported their book values. The 13 companies which didn¡¦t report

these values are typically distressed.

Finally, from my experience in regressing and analyzing the S&P 500, I

noticed that the WA ratios are:

WA P/E ¡V 18

WA P/B ¡V 2.8

WA P/CF ¡V 10

WA P/S ¡V 1.5

WA ROE ¡V 16%