Ok... so with the debates going and the concern on oil dependence I've seen where people have used oil company profits stating that they have made these HUGE HUGE profit gains.
Well I did a little investigating tonight because I like to get my hands dirty ;-). I think we can all agree that companies work for a profit of some kind (excluding non-profit). So what would we believe to be a reasonable profit %. 30%.... 20%... 15%... 10%... 5%.. 1%?
Starting small lets say we get 20% profit. That means that we get $20 for every $100 of product sold correct? Then $200 for every $1000 and so forth and so on.
So I went to Chevron's corporate web site and pulled up their financial annual report for 2007 and checked out their Net Income for 2007, 2006, and 2005. Net Income for those that do not know is what is left after paying all expenses/taxes from their Revenue.
From 2005 to 2006 they made a 21.5% gain. So every $100 sold they got $21.50
From 2006 to 2007 they made a 9% gain. So every $100 sold they got $9.00
http://www.chevron.com/annualreport/2007/financial...
Now... Looking at the quarterly results of this year.
I compared the 6 month (ending June 30th) Net Income totals for 2007 to 2008.
Net Income in 2007 for 2 quarters was 10,975 (in millions)
Net Income in 2008 for 2 quarters was 11,143 (in millions)
http://media.corporate-ir.net/media_files/irol/13/...
So by simple math to figure out the growth in percent.... 11143/10975 = 1.1038. That is only a 10.4% growth?!?
By now I'm thinking I did all my math COMPLETELY wrong. So I dug out my accounting book and did a little more research. I found that I wasn't wrong in my understanding. So I wanted to find out where people were flipping out and I think I found it.
People do not understand "Revenue." Revenue is not profits. Chevron shows a 43% growth in Revenue for the 2 quarters in 2007 to 2008. If these were profits I would probably complain myself. But these are not profits.
Now I'm all up for being wrong so if I am feel free to tell me. But do supply your own reasoning behind it. I think people are taking a few people's statements WAY out of context and causing a frenzy over what I would consider a reasonable growth percentage.
Do you feel that 10% growth is too much?
Update:Well Boss... this "boot-licker" is paying the same $1 at the pump you are. And yes.. my hands are still digging.
I realize the first calculation is kinda of crude but honestly that is a measurement MOST people can do themselves and all things considering I would only expect this to fluctuate 5%. I could be wrong though.
Update 3:Ok.. I'm not giving up but just don't have the time to keep digging atm. No use to extend the expiration of the post...
Thanks to AssKicker and Bandit for the good posts and supporting statements
and
Aka.... because you "couldn't resist!" ;-)
Answers & Comments
Verified answer
If you're going to read the 10-K's, you might as well learn how to read a statement of cash flows.
The income statement tells only about operations, and the net profit includes many expenses that aren't really expenditures of money, like depreciation and amortization, write downs of inventory and assets, and write downs of goodwill.
(For most companies, income statements never include the day-to-day changes in investment values, such as oil futures. Those are found on an obscure statement usually called, "other comprehensive income" or "changes in shareholder's equity".)
So you have to look at the statement of cash flows, as well, because it removes the fake stuff and adds all of the balance sheet transactions. The statement of cash flows is the ONLY PLACE where you're going to find out how much money oil companies are investing in future operations.
They represent the cash trading hands, not the artificial picture of operations.
(They guy below me is an idiot. Companies are required to offer only one measure of profit, and it must be formatted in the manner of a profit and loss statement. Boss is also an idiot. Income statements are ALWAYS consolidated, meaning all subsidiaries are already included.)
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And stop calling a liberal. It's frightening.
Finance books won't help you. You need an accounting book. But if you are daring, go back to that 10-K and just look at it, you might be able to figure it out intuitively.
They are always divided into three sections:
Cash used in operations (the primary business--oil sales)
Cash used in investing (building new businesses, buying stocks, etc.)
Cash used in financing (selling of company stock, borrowing of money)
The first section is a reconciling section. It will seem backwards if you try to figure out the negatives and positives because it's function is to BACK OUT the fake numbers on the income statement and return them to real cash-basis amounts. That's why depreciation is added back in. Money wasn't spent on it, so it should not have been deducted.
The last two sections are not backwards. They show where money was spent and where it was earned.
(The bottom lines don't do anything but reconcile the cash flows statement to the cash balance of the company.)
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Bandit is right. Some years there are large write downs or restatements that can shift a company's profit margin around.
Oil companies make a lot of money over and above all expenses. If that wasn't the case they wouldn't have so much cash to buy each other out, spend millions on advertising like the one where the nice looking lady comes out and asks, "Do you own an oil company?" Then there's the truly outrageous amount of money they spend on their pet politicians. Some folks would call it bribe money. Then there's the incredible tax breaks, write offs, subsidies and lately a war in Iraq using borrowed money to insure even more profits in the future. Then there's pollution, health issues and their cozy relationships with various thugocracies around the world...thugs that just happen to have a lot of oil. Basically Exxon/Mobile and the rest of these corporations act more like mafias than like legit business'. Who's fought harder against raising the mileage standards for personal transportation? Why? Clue: They sell oil. Using less means less profit. If there ever was an industry that needs to be nationalized this is the one. All those profits could be going to establish an non-oil infrastructure. Do you really believe that we'll be 'energy independent? Not as long as these bums own the oil and the politicians. They're never going to let it go until the last drop of oil is burned.....and where will they that leave us? Up you know what creek without a paddle!
You can never take 100 percent of the profits. That just doesn't work. At that point, there is no motivation for anyone to even attempt to turn a profit at all. When there is no motivation at all to try to turn a profit, the system just doesn't work very well. You can, however, tax corporations and the rich at much higher rates than we currently do, and still have an economic system that functions quite well. Back when Eisenhower was president, we taxed the rich at rates in excess of 90% on their income and it still worked. I'm not sure what rate oil, gas, and other corporations were taxed at during that time.
Expense write offs affect the numbers.
Last year the Wynn Corporation (Las Vegas based Gambling/Casino company) declared an emergency dividend of 767 million dollars to be dispersed to shareholders. Steve Wynn received 164 million for his share. Of course the Wynn corporation profits were way down because of this expense. Oil company profits are there ! Just subtract the fixed costs from the total revenues. The costs are predetermined by the past costs of refining a barrel of oil along with the distribution costs. All other expenses that offset profit are bookkeeping strategies.
Now add their subsidies and profits from subsidaries, and you might actually get closer to the truth.
Oil companies make far more profit than just on their oil section of their business. they make profits from their subsidaries that make far more products than just fuel from the same oil.
They also have chemical operations, which are considered sepearate companies, polymer operations which are separate companies, technology development operations which are all written up as separate companies.
Sounds like you need to get your hands a little deeper into the dirt.
i keep hearing you boot-lickers claiming that oil companies only make 8% of fuel to. But that is after the oil company has already sold the oil to their subsidary and recorded a profit on that, then the refinery gets to make about 6 different products from the same oil recording an 8% profit off the fuel, and profit off 5 other products. and that is only off oil. That does not include natural gas, polymers, or any of the other subsidaries they own.
That is why they are called conglomerates.
Are you one of the poor folk laid off from the banking sector, you've got too much time on your hands mate ;-)
Ah, I can't be bothered to check the accounts but you could be right, if there's one thing we know, politicians misuse and misquote all kinds of numbers.
Ok ok so I did do a quick check, damn you, I couldn't resist. Data on my Bloomberg terminal shows Chevron net income for FY2007 at US$18.69bn vs 17.14bn in FY2006 = 9% gain. Exxon Mobil was US$40.6bn vs 39.5bn = 2.8% gain. So you're right, for the biggest players in terms of profit gains, it's not all that great, but God only knows what kind off creative accounting has gone into these numbers!
because "profit" can be measured in different ways, depending on what kind of analysis you are doing.
every public company *must* by law maintain at least 3 different "profit" measurement systems.
AMEN!! No. 10% growth is not too much. They also do not understand risk. LOADS of risk. They won't get it though.