Glossary Definitions
| Arm’s length standard: | The condition that parties engaged in cross-border transactions are independent, and are not subject to common control. The arm‘s length principle is equivalent to comparable uncontrolled (independent) transactions with respect to product or services, functions performed, assets employed, risks assumed, contractual terms, and geographic market. We provide historical SEC 10K filings for each company in order to facilitate comparability analysis. |
| Quartile [Q1, Median, Q3]: | A data field (variable) is sorted and then divided into subgroups by three quartiles. The first quartile (Q1) is a point below which 25% of the observations fall, and a point above which 75% of the observations fall. The second quartile (Q2, or Median) is a point below and above which 50% of the observations fall. The third quartile (Q3) is a point below which 75% of the observations fall, and above which 25% of the observations fall. The interquartile range is the distance between Q3 and Q1, and the quartile deviation (also called semi-interquartile range) is the interquartile range divided by two, i.e., it is half the distance between Q3 and Q1. The quartile deviation is used to establish average deviation from the Median. Quartiles are useful when a variable contains outliers (which distort the estimates of the average and the standard deviation - thus, making confidence intervals for the average unreliable). |
| Operating Revenue: | Gross receipts derived from product sales or services minus returns and allowances. We must ascertain that this field excludes non-operating receipts, such as dividends and interest income. Accountants are not consistent in the treatment of company revenue recognition in SEC 10K filings. We provide historical SEC 10K filings for each company in order to facilitate comparability analysis. |
| Gross Profit: | Operating Revenue minus Cost of Sales. Accountants are not consistent in the treatment of cost of sales in SEC 10K filings. |
| Operating Expenses: | Selling, general and administrative expenses, including a “reasonable allowance” for the depreciation of plant & equipment and the amortization of intangibles. We must ascertain that the “tested party” and the selected comparables include depreciation of plant & equipment, and the amortization of intangibles in operating expenses. Accountants are not consistent in the treatment of operating expenses in SEC 10K filings. |
| Operating Profit: | Gross Profit less Operating Expenses (including depreciation and the amortization of intangibles). Equivalent to EBIT (Earnings before Interest and Tax). We provide information to compute operating profit before depreciation & amortization, or EBITDA (Earnings before Interest, Tax, Depreciation & Amortization). |
| Net Profit: | Gross Profit after the deduction of selling, general and adminstrative expenses, depreciation and amortization, plus non-operating receipts and net interest. Net profit is subdivided into dividends, income taxes, and retained profits to be added to the company balance sheet. Equivalent to Earnings, which is a vague expression that is better avoided. Net profit is irrelavent for transfer pricing analysis under U.S. transfer pricing rules. Therefore, we do not compute net profit margin. |
| Total Assets: | Total liabilities plus shareholders‘ equity. |
| Operating Assets: | Total Assets less Short-Term Investments and less Investments and Advances. |
| Gross Margin [%]: | Gross Profit / Operating Revenue. Before producing an interquartile range of gross profit margins from the selected comparables, we must ascertain that the selected comparables have equivalent allocation of costs and expenses between the cost of sales (cost of goods sold) and operating expenses. We provide historical SEC 10K filings for each company in order to facilitate such comparability analysis. |
| Berry Ratio: | Gross Profit / Operating Expenses (less Depreciation & Amortization). We must ascertain that the selected comparables have equivalent allocation of costs and expenses between the cost of sales (cost of goods sold) and operating expenses. The Berry ratio excludes depreciation & amortization of intangibles from operating expenses, and thus contains selling, general & administrative expenses in the denominator. We provide historical SEC 10K filings for each company in order to facilitate such analysis. |
| Operating Margin [%]: | Operating Profit / Operating Revenue. Equivalent to EBIT Margin. As a statistical matter, we can prove that, in general, operating margin is more reliable (i.e., it has a smaller variance) than return on operating assets. |
| Net Margin [%]: | Net Profit / Operating Revenue. |
| Return on Operating Assets [%]: | Operating Profit / Operating Assets. We must ascertain that the selected comparables used to calculate an interquartile range of return on operating assets have comparable balance sheets. Among other items, company balance sheets may be incomparable because of asset lease arrangements, acquired intangibles, and deferred expenses. |
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