Wednesday, July 8, 2009

The Capital Requirements of a Company

I found it odd that in Business School we never differentiated between the quality of a company's earnings: $1 in earnings was the same regardless of company. Yet the type of company that created those earnings is incredibly important. Some companies earning $1 can pay that entire amount out to shareholders without impacting the business whereas other companies need to maintain a substantial portion of 'earnings' in order to continue with the status quo. Companies that must retain significant portions of earnings are poor investments for shareholders even if they are making lots of money because they must plow most of that money back into capital requirements.