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