Author | Ednaldo Silva

Some basic rules of differential calculus are useful for understanding economic discourse, such as discussions in business or financial media about U.S. economic performance.

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Microeconomics are detached from the reality of corporate profits behavior. Here, I explore the operating profits (before depreciation and amortization) of a major group of U.S. corporations (consolidated entities) that make up a large fraction of U.S. gross domestic product.

Topics: Profit Indicators Corporate Profits Oligopoly US Transfer Pricing

The operating profit margin (OMBD or OMAD) can be derived from the profit markup by indirect least squares (ILS). This is the most theoretically defensible and reliable operating profit indicator that can be obtained from comparable data.

Topics: Transfer Pricing Operating Profit Markup TNMM/CPM Profit Indicators

U.S. 26 CFR 1.482-5(b)(4)(i-ii) claim that the “return on capital employed” (return on assets) is less sensitive to “functional differences” than the operating profit margin or the operating profit markup. This claim is based on the unrealistic premise that “capital flows” to equalize profit rates (return on assets) among companies in the same (or in different) industries by some "invisible hand."

Topics: Return on Assets TNMM/CPM Profit Indicators

Data suggest that “big oil” forms an oligopoly industry. Noise about oil and gas prices being determined by supply and demand is suspect.

Topics: Oil and Gas Transfer Pricing Profit Indicators US Transfer Pricing

Quartiles are the most elementary form of univariate (single variable) data summary, because no statistical technique beyond sorting and slicing (tagging) of the data is employed. Distributions of profit indicators have long tails, suggesting that the Median is a good measure for only 50% of the dataset.

Topics: Arm's Length Principle TNMM/CPM

Determining an arm’s length profit indicator (profit ratio) requires two equations, and not one equation, as prescribed in financial statement analysis textbooks. E.g., Bernstein (1993), Drake & Fabozzi (2012). An accounting critique of univariate profit ratios is found in Whittington (1986).

Topics: TNMM/CPM Profit Indicators

EdgarStat® contains an internal regression model to calculate the beta-risk coefficient of an individual enterprise stock price return compared to the return of the S&P 500 stock price (market) index. This stock price return regression model is known as CAPM.

Topics: Tutorial Valuation CAPM

Regression analysis yields more reliable profit indicators than the linear equation without intercept specified in US and OECD transfer pricing guidelines.

Topics: Tax Controversy Transfer Pricing Profit Indicators

Dr. Ednaldo Silva illustrates why asset intensity adjustments to the Return on Assets profit indicator are redundant and unviable.

Topics: Asset Intensity Adjustment Return on Assets Profit Indicators

Notwithstanding its acceptance in Coca Cola Co. v. Commissioner of the IRS, Return on Assets is a controversial profit indicator to use in transfer pricing. At the very least it must be subject to economic analysis to corroborate a relationship between operating profit and operating assets.

Topics: Tutorial Return on Assets Tax Controversy Profit Indicators

Ad hoc adjustments are a risky endeavor in transfer pricing. Using regression analysis, we can test if asset intensity is relevant to explain the behavior of the operating profit markup or profit margin and calculate a reliable adjustment to the profit indicator.

Topics: Tutorial Asset Intensity Adjustment TNMM/CPM Profit Indicators

The prevalent use of quartiles to determine profit indicators often results in a wide (unreliable range) and ad hoc assets adjustments. These problems can be solved by using regression analysis, which produces more defensible statistical ranges of the profit indicator resistant to audit scrutiny.

Topics: Tutorial TNMM/CPM Profit Indicators