What would happen if a companies profits just stayed the same over a period of quarters? I obviously don’t understand it at all but isn’t it just unsustainable to expect growth indefinitely?
In: Economics
There is actually a **very good reason** for this.
Imagine that you are CEO of a savings account.
The savings account bears 5% interest.
You start with $100.
Your boss the shareholder is entitled to all of the profits ($5).
You want to be an important CEO, and you can’t get paid very much for being CEO of a $100 savings account right?
You claim to your boss (the shareholder) that you will be able to give them *more money* if they let you *retain* the profit for reinvestment.
So, you keep the $5 and now you are CEO of a $105 savings account which has profits of 5% x $105 = $5.25.
Earnings went up! If you retain profits they should go up *every year*. (The savings account gets bigger).
Now imagine that you kept the $5, but you took a salary of $10. So the savings account now has $95, so “profits” are $4.75.
If you’re the shareholder that allowed the CEO to keep your money on the basis that they were going to reinvest it *how pissed are you?*
Tl;Dr – Shareholders don’t care if profits go up every quarter. However, *nearly every* company holds back some of the profits shareholders are entitled to based on the *promise* that they will use those profits to produce more profits in the future.
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