Category Archives: tool

Gross and Net Profits

Woman reading Profit First - Photo by Natasha Hall via Unsplash: https://unsplash.com/photos/o8KUqjk9gqE

Investors have made Apple (NASDAQ: AAPL) worth more than $2 trillion dollars. But how profitable is the company?

That depends on how you measure profit. If you want a raw number, calculating a company's gross income is a good place to start. That's just the difference between its total sales and its total cost of goods sold, ignoring its other costs of doing business. This figure is useful for comparing the basic profitability of a company's core business with that of other companies like it. It's also useful if you track it over time. If you see a company's gross profit swinging wildly from one period to the next, that can be a sign its core business is either highly volatile or, in the worst case, is not well managed. Which if you're going to invest in the company, is probably something you ought to know.

As an investor however, that's not enough information to tell you how profitable the company really is. For that, you need to take its operating costs, how much it pays in interest expenses, how much it pays in taxes, and its other income and expenses into account. Doing that will tell you the company's net income (sometimes called its net earnings), which is the real bottom line. A company with positive net income is making money and a company with negative net earnings is losing money.

For comparing companies, you will find its useful to standardize these measures of profitability by dividing each by the company's total sales revenue and expressing the result as a percentage. For gross income, the result of that math is called the gross profit margin and for net income, the result is called the net profit margin. These percentages will let you directly compare the profitability of companies with very different amounts of profit. And of course, will let you assess trends in a single company's profitability performance if you follow it over time.

All that said, we've built a tool to make it easy for anyone to do this math. All you need is the business' income statement. In the tool below, the default data comes from Apple's December 2022 10-K SEC filing [also available in PDF format], so the tool's results will tell you just how profitable Apple was at the end of 2022. If you're reading this article on a site that republishes our RSS news feed, please click through to our site to access a working version of the tool.

Income Statement Data
Input Data Revenues Expenses
Total Net Sales  
Total Cost of Sales  
Total Operating Expenses  
Interest Expenses  
Income Taxes  
Other

Gross and Net Profits
Calculated Results Income Profit Margin
Gross
Net

Of course, you're more than welcome to substitute the financial data for other companies in the tool to assess their profitability.

We've made a point of the importance of tracking a company's gross and net profit margins over time, so to that end, we'd like to point you to a very useful resource. Macrotrends features an online application that will chart a company's gross, operating and net profit margins over its recent history using information from its database. Follow this link to see where they've done that for Apple's profit margins going back to December 2009.

Image Credit: Photo by Natasha Hall on Unsplash. The book being read in the photo is Profit First by Mike Michalowicz, which has the enchanting subtitle "Transform Your Business from a Cash-Eating Monster to a Money-Making Machine". At this writing, the book has 7,091 reviews on Amazon, with 85% giving it five stars. Goodreads gives it a 4.27 rating, 51% of which are five star reviews. Most of the critical reviews point out the whole concept of the book could be summarized in five pages or less. Or perhaps just one blog post, but that's a challenge for another day.

Your Paycheck in 2023

Welcome to 2023! Since you've clicked through to this tool, we know you're here to estimate what your take home pay will look like after all those federal income and payroll taxes have been taken out of your paycheck. But first, since it's now in the public domain, here's what 1927 vintage cartoon characters Mutt and Jeff discovered to be the secret of success while working as income tax "experts".

Mutt and Jeff: As Income Tax Experts They Discover the Secret of Success, Douglas Daily Dispatch, 11 March 1927, via Library of Congress

Who knew?! But as anyone who has earned an income without offsetting losses and has paid income taxes knows, what Uncle Sam takes out of your paycheck can be pretty substantial.

How substantial can be affected by several factors. For instance, how much did you invest toward your retirement in a pre-tax 401(k) retirement account at work? Does your employer offer health or dependent care pre-tax flexible spending accounts that you might use this year? Did you get a raise to cope with President Biden's inflation?

Our 2023 paycheck tool can help you find out how the answers to these questions can affect your paycheck and more! If you're reading this article on a site that republishes our RSS news feed, please click through to our site to access a working version of the tool. Otherwise, you're more than welcome to enter whatever numbers you want to consider for what your paychecks might look like in 2023. It all starts... now!

Your Paycheck and Tax Withholding Data
Category Input Data Values
Basic Pay Data Current Annual Pay
Pay Period
Federal Withholding Data Filing Status
Have you filed a new IRS Form W-4 with your employer since 2019?
Number of Withholding Allowances (from your pre-2020 IRS Form W-4 if you haven't)
Extra Tax to Withhold per Paycheck (as requested on your IRS Form W-4)
401(k) or 403(b) Contributions Pre-Tax Contributions (%)
After Tax Contributions (%)
Flexible Spending Account Annual Contribution Data Health Care Spending Account
Dependent Care Spending Account
What if You Had a Raise? Desired Raise (%)

Your "Typical" Paycheck Data
Category Calculated Results Values
Basic Income Data Proposed Annual Salary (Including Raise!)
Typical Paycheck Amount
Federal Tax Withholding Amounts U.S. Federal Income Taxes
U.S. Social Security Taxes
U.S. Medicare Taxes
U.S. Additional "Medicare" Taxes (If Applicable)
401(k) or 403(b) Contributions Pre-Tax Contributions
After-Tax Contributions
Total Contributions
Flexible Spending Account Contributions Health Care Spending Account
Dependent Care Spending Account
Your Paycheck's Bottom Line
Take Home Pay Estimate Basic Net Paycheck Amount
... But, After Social Security's Taxable Income Cap Is Reached, It Becomes (If Applicable, for a Full Paycheck)
... And Then, After Additional Medicare Tax Income Threshold Is Reached, It Becomes (If Applicable, for a Full Paycheck)

The tool's results convey how much money the IRS withholds for federal taxes from each of your paychecks in 2023. There are however a number of factors that will complicate your withholding tax results based upon how much you cumulatively earn during the year.

For example, once your cumulative income reaches $160,200 or higher, you will no longer have Social Security's payroll tax of 6.2% of your income deducted from your paycheck (if you're self-employed, that payroll tax is 12.4%). The tool above is designed to provide withholding tax estimates for the majority of Americans who are employed by others. People making this amount of money don't really get a break however, because they've already been pushed into a higher tax bracket, paying higher regular income tax rates than those paid by over half of all income-earning American households.

There's also the complication provided by the so-called "Additional Medicare Tax" that your employer is required to begin withholding from your paycheck if, and as soon as, your year-to-date income rises above the $200,000 mark. This surtax of 0.9% of gross income was imposed by the "Affordable Care Act" (a.k.a. "Obamacare") in 2010, which is still in effect. Since the money collected through this surtax does not directly support the Medicare program, unlike the real Medicare payroll taxes paid by you and your employer, it is really best thought of as an additional income tax. That additional income tax is not adjusted for inflation, which means that those who must pay it are subject to 1970s-style income tax bracket creep, even though the tax was sold on the claim that it would be limited to only very high income earners.

In the tool above, when the amount of your annual 401(k) or 403(b) retirement savings contributions exceed the annual limits set by law, we've limited the results our tool provides to be those consistent with their statutory limits, and will do so as if you specifically set the percentage contributions for these contributions with that in mind. Our tool does not consider whether you might take advantage of the "catch-up" provisions in the law that are available to individuals Age 50 or older, which increase those annual contribution limits by as much as $7,500 in 2023.

Elsewhere on the Web

There are other salary and hourly paycheck calculators like this on the Internet, including the very well done tools available at PaycheckCity.com. PaycheckCity's State Salary Paycheck Calculators allow you to determine the amount of state income tax withholding that will be taken out of your paycheck in addition to what the federal government will take out. Payroll processing giant ADP also has a salary paycheck calculator that will give you good results. Overall, we find the format of PaycheckCity's calculators to be more user friendly, but ADP's version has the benefit of having an all-in-one user interface.

If however you live in one of the nine states that have no personal income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming), our tool above will provide you with a very good estimate of your actual take-home pay after Uncle Sam has left his greasy fingerprints all over it.

Previously on Political Calculations

We've been in the business of calculating people's paychecks (not including state income tax withholding) since 2005!

The S&P 500 Dividend Engine

Did you ever wonder how much money you could earn in the form of cash dividends if you were invested in the S&P 500 (Index: SPX)?

Josh Scandlen of Heritage Wealth Planning did, discovering he could use one of our signature tools, The S&P 500 at Your Fingertips, to extract the information he was after. He put together the following 14 minute YouTube video to explain both how dividends work for you as an investor and how to get cash dividend payout information from our tool:

After watching the video, we had two thoughts:

  1. That's an incredibly useful idea for investors, particularly those looking for dividend income after they retire.
  2. There's got to be a much easier way to get that dividend payout data.

Long time readers will already see where this discussion is heading! We've built a new tool, one that ties directly into the quarterly dividend data that Standard & Poor reports in spreadsheet form for its heralded S&P 500 index. In it, we put you in the shoes of someone who has either just bought into the index or has just flipped the switch to begin collecting cash dividends from it during the month ending a historic calendar quarter.

Based on the value of the investment at that point of time, it estimates the equivalent number of shares of the S&P 500 you own. It then calculates how much dividend income you would have collected at a later point of time, assuming you never sell any of the shares you own. It will also tell you how much your investment in the S&P 500 is worth at that later point of time you selected.

But that's not all! The tool also extracts how much you would have earned in dividends during the first calendar year of your investment, during the final calendar year, and also during any calendar year that might interest you in between. It will also identify the highest and lowest amount of dividends earned in any calendar year throughout your full period of interest.

If you're ready, here's the tool. If you're reading this article on a site that republishes our RSS news feed, please click through to our site to access a working version of the tool.

S&P 500 Investment Value and Dividend Payout Period
Input Data Investment Value Year Quarter
Enter Starting Investment Value and Select Starting Year and Quarter
Select Ending Year and Quarter
Optional Input Data Year
Select Year Between Starting and Ending Years to See Annual Dividend Payout

Investment and Dividend Payouts
Results Investment Value Dividends Paid Out
At the End of the Selected Period
Dividend Payout Milestones
Milestone Year Value
Dividends Paid Out By End of First Calendar Year
Dividends Paid Out Through Selected Quarter in Final Calendar Year
Dividends Paid Out During Optional Selected Year
Highest and Lowest Annual Dividend Payouts
Lowest Annual Dividend Payout
Highest Annual Dividend Payout

We've set the default data in the tool up to reflect the example Josh Scandlen worked in his video, but we've made all the quarterly dividend data we have for the S&:P 500 and its predecessor indices and component stocks going back to 1871. If you want to see that historic data, you can access it either through our The S&P 500 at Your Fingertips tool, which is updated monthly, or at our Quarterly Data for the S&P 500, Since 1871 resource, which we update annually.

Speaking of updates, we plan to update this tool in January 2023 after 2022's dividend data is available, then quarterly afterward.

Using the tool, we recommend selecting different periods and paying attention to when the lowest annual dividend payout data differs from the first year's data. The idea here is that you would want your investment to handle a worst case scenario when the market experiences a major downturn. While this will depend on what periods you might cover, we found that 1896 and 1933 represent major low points for a multi-decade investment holding period.

That said, we're celebrating our anniversary today, and what better way to do it than building on the capabilities of a tool we featured in one of our earlier anniversaries!

Celebrating Political Calculations' Anniversary

Our anniversary posts typically represent the biggest ideas and celebration of the original work we develop here each year. Here are our landmark posts from previous years:

  • A Year's Worth of Tools (2005) - we celebrated our first anniversary by listing all the tools we created in our first year. There were just 48 back then. Today, there are over 300....
  • The S&P 500 At Your Fingertips (2006) - the most popular tool we've ever created, allowing users to calculate the rate of return for investments in the S&P 500, both with and without the effects of inflation, and with and without the reinvestment of dividends, between any two months since January 1871.
  • The Sun, In the Center (2007) - we identify the primary driver of stock prices and describe a whole new way to visualize where they're going (especially in periods of order!)
  • Acceleration, Amplification and Shifting Time (2008) - we apply elements of chaos theory to describe and predict how stock prices will change, even in periods of disorder.
  • The Trigger Point for Taxes (2009) - we work out both when, and by how much, U.S. politicians are likely to change the top U.S. income tax rate. Sadly, events in recent years have proven us right.
  • The Zero Deficit Line (2010) - a whole new way to find out how much federal government spending Americans can really afford and how much Americans cannot really afford!
  • Can Increasing the Minimum Wage Boost GDP? (2011) - using data for teens and young adults spanning 1994 and 2010, not only do we demonstrate that increasing the minimum wage fails to increase GDP, we demonstrate that it reduces employment and increases income inequality as well!
  • The Discovery of the Unseen (2012) - we go where so-called experts on income inequality fear to tread and reveal that U.S. household income inequality has increased over time mostly because more Americans live alone!

We marked our 2013 anniversary in three parts, since we were telling a story too big to be told in a single blog post! Here they are:

  • The Major Trends in U.S. Income Inequality Since 1947 (2013, Part 1) - we revisit the U.S. Census Bureau's income inequality data for American individuals, families and households to see what it really tells us.
  • The Widows Peak (2013, Part 2) - we identify when the dramatic increase in the number of Americans living alone really occurred and identify which Americans found themselves in that situation.
  • The Men Who Weren't There (2013, Part 3) - our final anniversary post installment explores the lasting impact of the men who died in the service of their country in World War 2 and the hole in society that they left behind, which was felt decades later as the dramatic increase in income inequality for U.S. families and households.

Resuming our list of anniversary posts....

The Best Tools for Investors to Detect Potential Accounting Fraud

A lonely accountant uses advanced internet based analytical models to detect fraud at a publicly-traded firm.

What are the best tools investors can use to detect potential accounting fraud at the firms in which they might invest?

That's not an easy question to answer. That's because accounting fraud is almost invariably an inside job, where most investors are on the outside looking in. Most investors simply don't have the access to information about the transactions that constitute the bulk of accounting fraud where it exists.

But for publicly-traded firms, investors can access their financial statements. If the scope and scale of potential accounting fraud at a firm is big enough, the signs of it can show up in them. Accounting professionals have developed tools to help them identify known signs of fraud within financial statements.

That brings us back to the beginning. What are the best tools investors can use to find the signs of potential accounting fraud in financial statements?

A 2021 paper by Messod Beneish and Patrick Vorst, who evaluated seven fraud prediction models. They sought to identify the tools that could successfully identify firms where real accounting fraud may be occurring, without triggering too many costly false positives in the process. Here's the list of tools they evaluated, which are identified by their creator(s) and the year the tool was introduced:

  1. Beneish (1999) M-Score
  2. Cecchini et al. (2020)
  3. Dechow et al. (2011) F-Score
  4. Amiram et al. (2015) FSD Score
  5. Alawadhi et al. (2020)
  6. Bao et al. (2020)
  7. Chakrabarty et al. (2020) ABF Score

The M-Score was developed by Messod Beneish, so as the analysis goes, we should recognize that he has skin in the game for the evaluation.

Let's cut to the chase and go straight to the conclusion to find out which tools the authors evaluated came out on top in their analysis and why they did:

We compare seven fraud prediction models that have been proposed in prior research. We find that the higher true positive rates in recent models come at the cost of higher false positive rates and that even the best models trade off false to true positives at rates exceeding 100:1. Indeed, the high number of false positives makes all seven models considered too costly for auditors to implement, even when we consider extreme subsamples where a priori firms’ management has higher incentives and/or ability to misreport. We believe this could explain audit practitioners’ apparent reluctance to use these models, despite the fact that models have nearly doubled their success at identifying fraud when compared to the initial models in Beneish (1997, 1999).

For investors, M-Score and the F-Score when used at higher cut-offs are the only models providing a net benefit when applied to the sample as a whole. We conjecture this occurs because the M-Score and the F-Score exploit fundamental signals that have been shown to predict future earnings and returns, and the main component of investors’ false positive costs is the profit foregone (or the loss avoided) by not investing in a falsely flagged firm. In addition, we find that most models are economically viable if applied to top or bottom quintiles of characteristics of firms in which managers a priori have greater incentives and/or ability to misreport.

At this point, we'll point out that we also have skin in the game, which is why the conclusion of this paper attracted our attention. Political Calculations has tool based on the F-Score fraud detection model: Using the F-Score to Detect Accounting Fraud. Meanwhile, a tool based on Beneish's M-Score model is also freely available in both spreadsheet and online tool formats.

Aside from having built a tool based on one of these potential accounting fraud prediction models, we'll recommend using either or both. It's hard enough as an investor to do proper due diligence to choose which companies you might invest in. If the potential for fraud is a concern, it's worth the time and effort to use the most effective tools to either rule it in or out of your portfolio.

References

Messod D. Beneish and Patrick Vorst. The Cost of Fraud Prediction Errors. The Accounting Review. DOI: 10.2308/TAR-2020-0068. [SSRN Preprint]. 30 December 2021.

Image Credit: Stable Diffusion DreamStudio beta "A lonely accountant uses advanced internet based analytical models to detect fraud at a publicly-traded firm."

America’s Missing Electricity Generation Capacity

How much more electricity generation capacity needs to be added to the U.S. power grid to fuel a complete conversion electric cars?

Last week, we took on the personal finance question of whether a petroleum or electric-powered vehicle is the better buy, but we didn't stop to consider where that electricity comes from. The following chart shows the mix of sources that Americans used to power the U.S. economy with 4,109 terawatt-hours (TWh), or 4,109 billion kilowatt-hours (kWh), in 2020.

2020 U.S. Electricity Generation by Type

The most important thing to recognize about this chart is that only an exceptionally small fraction of all that power generated actually goes to charge up electric-powered vehicles. Nearly all of that generated electricity is used instead for other purposes, which means that if Americans are to fully switch over to electric vehicles, the country needs to significantly boost its electric generation capacity to provide the juice they will need to run.

So how many cars are we talking about? For a visual frame of reference, the next chart shows how tiny the share of electric vehicles was in 2020. (For simplicity, we've grouped all electric vehicles into the Automobiles category).

2020 U.S. Vehicle Mix by Type

From here, we just need to know that the average electric vehicle consumes 34.6 kilowatt-hours (kWh) of electricity to travel 100 miles, and we can run some back-of-the-envelope numbers to find out how much more electricity generation capacity will be needed to avoid things that would lower the quality of life for Americans or harm the economy, like rolling blackouts.

We built a tool to do the math. If you're accessing this tool on a site that republishes our RSS news feed, please click through to our site to access a working version.

Electric Car and Power Generation Data
Input Data Values
Number of Electric Vehicles Being Added to U.S. Roads
Average Electricity Consumed per 100 miles Driven [kWh]
Average Annual Miles Driven per Vehicle
Power Generation Capacity Factor

America's Missing Electricity Generation Capacity
Calculated Results Values
Additional Electricity Generation Needed [TWh]

For our default data, we find that the U.S. power grid will need to expand its capacity by 583.0 TWh per year to accommodate the power needs of 104,124,090 electric vehicles. Today, that additional needed electricity generation capacity is missing from the United States' power grid.

This result assumes the new electricity generation capacity comes from nuclear energy, which according to the U.S. Energy Information Administration, is the most reliable source of electricity. Of course, there are other ways to generate electricity, for which you can substitute the EIA's indicated capacity factors for those other sources in our tool.

U.S. Capacity Factor by Energy Source - 2021

As you'll find, your choice of how that electricity is generated has a huge impact on how much more electricity generation capacity will be needed just to power electric vehicles.

References

Daly, Lyle. How Many Cars Are in the U.S.? Car Ownership Statistics 2022. Motley Fool. [Online Article]. 18 May 2022.

International Energy Agency (IEA). Electric Vehicles. [Online Report]. November 2021. Accessed 10 September 2022.

U.S. Department of Energy Office of Nuclear Energy. What Is Generation Capacity? [Online Article]. 1 May 2020.

Wallach, Omri. Road to Decarbonization: The United States Electricity Mix. Visual Capitalist. [Online Article]. 31 August 2021.