Corporate Profit: What it Means, How it Works

What Is Corporate Profit?

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 profit is also a statistic reported quarterly by the U.S. Bureau of Economic Analysis (BEA) that summarizes the net income of corporations in the National Income and Product Accounts (NIPA). The National Income and Product Accounts (NIPA) are part of the national accounts of the U.S. and are one of the main sources of data on general economic activity in the United States.

Understanding Corporate Profit

Corporate profit is an economic indicator that calculates net income using several different measures:

• Profits from current production: Net income with inventory replacement and differences in income tax and income statement depreciation taken into consideration. This is also known as operating or economic profits.
• Book profits: Net income, less inventory, and depreciation adjustments.
• After-tax profits: Book profits after taxes are subtracted. After-tax profits are believed to be the most relevant number.

Because the BEA corporate profits number is derived from the NIPA (which is dependent on gross domestic product (GDP) and gross national product (GNP)) these profit numbers are often quite different from profit statements released by individual companies.

Corporate profit is an especially important measure for investors to look at because it represents a corporation's income. Increasing profits means either increased corporate spending, growth in retained earnings, or increased dividend payments to shareholders. All of these indicators are good signs for an investor.

Investors may also use this number in a comparative analysis. If an individual company's profits are increasing while the overall corporate profits are decreasing, it could signal strength in the company. Alternatively, if an investor notices that an individual company's profits are decreasing while overall corporate profits are increasing, a fundamental problem may exist.

Overall, corporate profits in the U.S. slumped nearly 12.4% percent to $1.67 trillion in the first quarter of 2020, after rising 2.1% in the previous period (and compared with a preliminary estimate of a 14.2% plunge). It was the sharpest decline in corporate profits that the U.S. economy has experienced since the last quarter of 2008. However, the overall decrease in corporate profits for 2020 was 5.2%. Further indication of economic rebound is evident in the 10.5% increase in the second quarter of 2021.