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If you have a growth company with high return on capital the worst thing to do would be to return the operating profits as taxed dividends or just sit on the ca

If you have a growth company with high return on capital the worst thing to do would be to return the operating profits as taxed dividends or just sit on the cash or something like that. If you can grow the business then the best thing to do with those operating profits is to pump it back into expanding the business and the capital and capturing more revenue next year. You aren't losing money, you're building a larger economic engine for capturing future cashflows, which is doing your investors a favor since they'll own a larger chunk of the economy next year. This assumes that the business is, of course, growing though and growing at a faster rate than the economy and its competitors, and that it has a positive return on capital from the core of the business. A growing company with high return on capital which is not aggressively reinvesting in itself would be a red flag. This should go in one of those "Myths that Engineers Believe about Finance" that all companies that don't produce profits are bad.

VHRanger 3y ago
There's a difference between accounting profits and economic profits. Growing a company that loses on its unit economics (eg. WeWork) ought not to make founders rich
- lamontcg 3y ago
  You're assuming that the only way for a company to not post profits is for all its margins to be flat-to-negative. If the company has high operating margins and high growth then it makes sense to take those profits and reinvest in capital and R&D to make the company bigger. That is the definition of an efficient economic machine builds itself, and the way to a very good stock for the investor. That is different from the pathological stock with flat operating margins which is growing on debt, spending $1 to make less than $1 at the margins and will only consume itself as it grows. And learning to tell the difference between those two requires learning to read 10-K's, you can't just look at the net earnings bottom line.

VHRanger 3y ago

There's a difference between accounting profits and economic profits. Growing a company that loses on its unit economics (eg. WeWork) ought not to make founders rich

lamontcg 3y ago
You're assuming that the only way for a company to not post profits is for all its margins to be flat-to-negative. If the company has high operating margins and high growth then it makes sense to take those profits and reinvest in capital and R&D to make the company bigger. That is the definition of an efficient economic machine builds itself, and the way to a very good stock for the investor. That is different from the pathological stock with flat operating margins which is growing on debt, spending $1 to make less than $1 at the margins and will only consume itself as it grows. And learning to tell the difference between those two requires learning to read 10-K's, you can't just look at the net earnings bottom line.