Sunday, August 17, 2008

Focusing on the Wrong Stuff

The perception that ExxonMobile—the world’s largest company—has made excessive profits ignores the reality that its large profit is based upon an enormous sales figure, and an almost as enormous expense figure.

People who have gotten all worked up over the $40.6 billion Exxon-Mobile profit are reacting to the number of dollars when they declare that the oil giant “made too much money,” completely ignoring that the company made what is really a quite moderate 9.2 percent net profit margin.

What’s important in this example isn’t the number of dollars the company made, but the percentage of sales left over after the bills have been paid.

ExxonMobile made $40.6 billion, which is a lot of money, true enough. But it had to sell $404.5 billion of products in 2007, and spend $364 billion producing those products, to earn that profit, which is a mere fraction of both those numbers.

ExxonMobile spent 10 times as much as it made in profit doing business in 2007, for such things as salaries and wages, raw materials, and operations. A far more relevant figure is the nearly $30 billion in taxes ExxonMobile paid in 2007. That’s a lot of money, too, and every dollar of expense and profit—and taxes—comes from the income from sales and investments. Take $30 billion out of the price of ExxonMobile products, and consumers would be much happier.

And, consider that Nokia, a company with a less tarnished image than the oil companies these days, makes more money on a dollar of sales than ExxonMobile at 14.11 percent. Nokia is not as large as ExxonMobile, however, with sales of only a fifth of those of the oil giant at $75.2 billion. Nokia had net income of just $10.6 billion.

But if Nokia was as large as ExxonMobil, its profit would be not $10.6 billion, nor even $40.6 billion, but $57 billion. Nokia then would be thought to be “greedy” and to have made “obscene” profits, according to the rule for such things.

People would do well to get beyond the silly politics of demonizing profits and focus their attention on more pertinent things, like learning why high taxes, high government spending, and a bloated federal bureaucracy are much more harmful than successful corporations.

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