Proving that the corporations 32% in taxes, and employee costs are
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%

- posted 11 years ago