What is it?

Corporate profit is the money left over after a corporation pays all of its expenses. All of the money collected by a corporation during the reporting period from services rendered or sales of a product is considered top-line revenue. From revenue, a company will pay its expenses. Money left after expenses are paid is considered to be the company's profit.

Corporate profits are key in the determination of a company's stock price. Profits are after tax but without inventory valuation and capital consumption adjustments.

Corporate profits represents the portion of the total income earned from current production that is accounted for by U.S. corporations. It is one of the most closely watched U.S. economic indicators, as it provides a summary measure of corporate financial health and thus serves as an essential indicator of economic performance.

When corporate profits are rising, then stock prices will likely rise; when profits are falling, then equity prices will probably decline as well. Corporate profits are one of the more volatile series on a yearly basis. Profits are the residual - the left over - from revenues after expenses are taken out - and taxes for after-tax corporate profits. While each component (revenues, expenses, and taxes) is not that volatile, the net is.

A statistical metric produced by the Bureau of Economic Analysis which measures the net income of companies listed on the National Income and Product Accounts. The metric includes after-tax profits, profits from current activities and book profits.

Calculate

Determine the period for calculating corporate profits. Most companies report sales by quarter and by fiscal year. Let's say you want to calculate corporate profits for the most recent quarter. The process for calculating corporate profits is the same, however, regardless of the period used.

Determine the company's total revenue. This is total sales for the company. Let's say total sales for the previous quarter are $100,000.

Calculate gross profit. Determine the cost of goods sold (COGS) and subtract from total sales. The COGS is the cost of all materials and inventory used for the past quarter. Let's say the COGS is $50,000, so the calculation is $100,000 - $50,000 = $50,000.

Determine operating income. Subtract operating expenses from gross profit for operating income. If operating expenses are $5,000, the calculation is: $50,000 - $5,000 = $45,000.

Calculate corporate profits. Subtract taxes and interest expense (or income) from operating income. Let's say that taxes are $5,000 and interest expense is $1,000. The calculation is: Operating income - taxes - interest expense = X, or $45,000 - $5,000 - $1,000 = $39,000.

What's behind the rise in U.S. corporate profits?

Globalization, technological innovation, and supply chain efficiency explain the current resilience of U.S. corporate profits one of the few drivers of the U.S. economy at the moment.

The U.S. Department of Commerce recently reported that corporate profits (which includes both domestic and foreign profits) now make up the largest percentage of the country's gross domestic product (GDP) since the 1950s. This ratio currently stands at just under 13% of GDP, amounting to a total of US $1.9 trillion.

However, wage and salary disbursements have been slowly trending downward from 47% of GDP in 1985 to 44.4% in the second quarter of 2011. These trends seem to point to increased inequality between workers and managers, driven to some extent by the outsourcing of lower-skilled jobs to Asia.

For years, unemployed Americans have complained that even as companies have done so well, workers’ own fortunes have stagnated.

Like employment, corporate profits plummeted during the financial crisis; but unlike employment, profits bounced back almost as quickly as they had fallen. Then, in subsequent quarters, profits kept climbing and climbing, reaching record highs each month. Millions of workers sat on the sidelines, watching companies sit on mountains of cash rather than hire. Employers said economic uncertainty kept them from hiring, since they were concerned that the orders would stop rolling in.

Whether attributable to prescience or self-fulfilling prophecy, business has finally stagnated.

CP as % of GDP

U.S. domestic corporate profits defined as American corporations' profits generated from operations in the United States trended downward from the 1950s through the mid-1980s. But then that trend reversed, with profits experiencing wild swings during recession cycles. In the 1960s, domestic corporate profits were slightly less than 11.0% of GDP, falling to 7% by 1985.

Analysts have been amazed at the rate at which domestic corporate profits have been able to spring back following the "Great Recession" (December 2007 to June 2009). Indeed, domestic corporate profits as a percentage of GDP fell to their lowest point in over 60 years during the recession and then rebounded to their pre-recession levels in just over one year. .

A major game changer in the last couple of decades has been the increasing influence of foreign profits the profits U.S. corporations earn from overseas receipts.

In the mid-1960s, U.S. corporations were making approximately 6.5% of their profits from foreign operations, which translated to less than 1% of GDP. By the mid-1990s, foreign profits started playing a stronger role in overall corporate profitability.

Foreign profits are now slightly less than 4.3% of GDP up more than four-fold from the mid-1980s and American corporations now make 30% of their profits from foreign sources.