Not long ago, I talked a little about the relationship between the so-called retained earnings and undivided profits in companies and the value of companies (i.e., also the value of shares). Undistributed profits, according to my experience, can have a lot to do with their name. Today about them, cench action and even gold.
I came across the following two charts that focus on stock market valuations and gold. In the first case, it is specifically the ratio of the value of the American stock index SPX 500 to the profits retained in companies over the last seven years. In the second case, it is the ratio of the price of gold to these retained profits. According to Gavekal Research, shares are now expensive from this point of view, but the opposite should be true for gold, as its price is low compared to the retained profits from a historical point of view:
Source: X
We are not allowed to criticize the authors of the chart for their length and approach. However, as I wrote, the dark profit may be worth paying attention to, and that’s why I’m coming back to it in connection with the images. From my experience, retained earnings can sometimes be used as a valued asset in a way that is misleading. The crux of the matter is, of course, what retained earnings are. Their name (in both Estonian and English) might give the impression that it is cash that the company has spent and that is just ready to be distributed. If it were so, then it would make sense to ask this cash (which is necessary for the operation of the company) to the total values of the company. Only retained earnings are something else.
Let’s say that a company has revenues of 100 million dollars, total costs and taxes are 90 million, so a certain profit will reach 10 million dollars. Do not pay anything out of it. His own name will thus increase by these withheld profits, which, on the other hand, can finance ad vc. For example, the company’s receivables could increase by 10 million, so its free cash flow is zero. The company could therefore use the profit to buy a new machine, even outside of resources. General for expansion. I also keep cash, but it is far from a rule.
Ji Soustrunk
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