Show THE VOICE OF BUSINESS Profit How to Read the Scorecard By fly Arch Arth Booth executive vice president of el the She Chamber of Commerce of the United States Sometimes businessmen are their own worst enemies Reporting on profits is isone Isone isone one of ot those times Corporate officers are concerned with pleasing those who employ them a characteristic not unique to corporate officers They are arc employed by the dir dirr directors directors colors who are elected by the stock stocks holders hoders ho ders The stockholders measure performance per by among other things how profitable e the corporation is is UNFORTUNATELY THE process of ot making profit prom look leok good to the stock stocks holders often orten makes it look too good goad to the general public People get the mistaken idea that business is doing very cry well when it really isn't For example how often have you seen this kind of ot headline on a story in the business pages Acme Widgets Reports Profit Prom Up 44 percent Does that mean Acme is making a 44 percent profit Certainly not For one American Ameri Amerl can manufacturer 1972 profit was up 70 percent over 1971 A big improvement improve improve- ment Yes A lot of profit No This company's actual tax after profit was 18 percent of ot sales in 1971 and 31 percent per perr cent in 1972 Record High Highs Or how about this one Business Profit Profit Pro Pro- fit at Record High That's not sur sure We have a growing economy and a growing population When there are more businesses s and bigger business business business bus bus- iness earning money every year the total amount of ot profit in dollars is quite likely to go up year after alter year But as the pie gets bigger it also has hasto hasto hasto to be divided up among more businesses The size of ot the slice for each of them may actually get smaller THEN THERES THERE'S before tax profit It was billion last year That's An impressive figure But corporations paid 43 8 percent of ot that in income tax to various levels of ot government so the before tax figure it not very useful useful useful use- use ful if it youre you're trying to figure out how much businesses and their owners have left to spend Finally there are different ways of measuring or reporting profit both for individual companies and for the economy as a whole For Far an individual company the two most common methods of ot reporting pro pros profit fit are as a percent of stockholders equity and as a percent of sales STOCKHOLDERS EQUITY is is what the business is officially worth to its owners It is based on the value of tangible assets like land and machinery It is usually calculated in a very conservative conservative con con- fashion If the original corporate corporate corporate corpor corpor- ate purchaser of ot Manhattan Island still owned it it the land would be valued the books at its purchase price 24 So Su Stockholders equity is likely to understate understate understate un un- the value of ot a business as a going concern and as a consequence profit will look high compared to it Profit as a percent ot sales is easier easier easier ier to understand If a company sells of ot merchandise during the ye year r rand and has left after paying expenses then its profit is 5 percent of sales The Real World How do these two figures compare for some real companies For a big steel company 1971 profit was 31 percent percent per per- cent of sales and percent of stockholders stockholders stockholders' stockholders stockholders' stock stock- holders' holders equity A giant in the chemical chemi cal industry earned 93 percent on sales that year or percent on stockholders stockholders stockholders' stockholders stockholders' ders' ders equity For a well-known well publishing publish ing company the figures were 49 percent percent percent per per- cent and 1029 percent respectively In each case were we're talking about the same amount of ot profit in dollars but com corn jl paring y paring it to two different yardsticks NA NATIONALLY y TH THE E yardsticks change again There is no stockholders equity figure for tor all business Profit sales sates but as percent of ot shows up only for tor non financial corporations No national sales figure is available for tor financial corporations insurance finance and real estate Two new bases are arc used Profit as a percent of ot Gross Corporate Product and profit as a percent per pcr percent cent of Income Originating in Corporate Corpor ate Business The difference between the last two would be of ot interest only to an economist How flow do the figures look by these three yardsticks For Jor 1971 pro pros profit fit was 23 percent of ot sales 69 percent per cent of ot and 87 percent of ot For Jor 1972 the results would be a little better WHICH METHOD is correct They all are arc Each way of looking at profit has hs its uses The important point is that if you want to know how well business bus bus- iness mess is doing it is necessary to know what yardstick is being used and whether er en that yardstick tends to Inflate or deflate the final linal figure |