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It's completely right. Why would you invest $250K for a year's pay of an employee for $0 return. You can invest that $250K in a CD for 2% and get $5,000. Shar
by throwaway5752 9y ago
It's completely right.
Why would you invest $250K for a year's pay of an employee for $0 return. You can invest that $250K in a CD for 2% and get $5,000.
Shareholders are going to have no interest (long term) having companies invest their capital in the form of cash on the balance sheet at below market rates. Hence dividends or buybacks if they can't demonstrate sufficient roic on internal projects.
You can back into a target revenue/employee by looking at risk free rate of return + equity premium (say 7%), net margin (35% for FB this Q), and say if an avg employee earns $250K .... then they'd want a bit less than $800K/employee (35/100 * x >= 250k + (.07 * 250k)).
I don't think your comparison to widgets holds up. Would a company invest capital in more production capacity to sell more widgets at zero margin (all else being equal)? No, they'd distribute it to shareholders so they could invest it in bonds or other companies, and that's the analogy.
- thaumasiotes 9y ago> I don't think your comparison to widgets holds up. Would a company invest capital in more production capacity to sell more widgets at zero margin (all else being equal)? No Who said anything about zero margin? You're claiming that if I can sell one widget at a high price (high margin!), I should be unwilling to sell any at a lower price (but still high margin!) than the first one would sell for, because my rate of return on investment would go down (assuming the cost of producing a widget is dominated by variable costs). This does not describe the behavior of anything.