The Most Profitable Companies in America

Table 11.7 shows business profit rates for a sample of top-performing large firms from the United States. Profitability is measured by the rate of return on equity, thereby including the effects of both operating and financing decisions. These data demonstrate that market leaders earn truly extraordinary profits. In industries that produce distinctive goods and services, and in others that offer fairly mundane products, the most profitable firms in America earn an average rate of return on equity (ROE) that is a whopping 310.4 percent of all-industry norms. This means that the most profitable firm in a typical industry earns roughly 42.09 percent on capital, or far in excess of the average return on capital of 14.12 percent per year for large and highly successful U.S. companies. Notice that this average profit rate is only slightly above the 12 percent long-term average ROE typical for all companies.

It is obvious that the most profitable companies in America are able to outpace industry norms by a significant margin. Some of this variation in business profits represents the influence of risk premiums necessary to compensate investors if one business is inherently riskier than another. In the prescription pharmaceuticals industry, for example, hoped-for discoveries of effective therapies for important diseases are often a long-shot at best. However, apart from such risks, the observed intraindustry variation in profitability makes it clear that many firms earn significant economic profits or experience meaningful economic losses at any given point in time. Some above-normal returns in monopolistically competitive and oligopoly markets also reflect temporary good fortune due to unexpected changes in industry demand or cost conditions and/or profits due to uniquely productive inputs. However, most superior performers clearly are doing something faster, better, or cheaper than the competition.

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