Where are a company's profits invested?

Ask your investment, budget, and other money related questions here
Post Reply
lillo9546
Posts: 136
Joined: Sun May 22, 2022 12:17 pm
Location: Italy

Where are a company's profits invested?

Post by lillo9546 »

Hi!!

Companies usually make a profit. This profit must be invested to generate more profit. How and where are these profits usually invested? Is there a branch, or a field of study, that has been learning the dynamics of this process since the beginning of human history, which therefore also transcends the invention of "money", the fiat currency, as we know it today?

chenda
Posts: 3289
Joined: Wed Jun 29, 2011 1:17 pm
Location: Nether Wallop

Re: Where are a company's profits invested?

Post by chenda »

Economic surplus.

jacob
Site Admin
Posts: 15907
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 77
Contact:

Re: Where are a company's profits invested?

Post by jacob »

Read this: https://www.amazon.com/Accounting-Game- ... B001U29UIU

The earnings that are not paid out in dividends are invested back into the business and called retained earnings, e.g. buying more inventory to sell, hiring more salesmen, paying taxes and interest on business loans (obtaining loans is another form of funding aside from retained earnings), etc. usually (but not always) with the goal to increase future earnings.

The field of study is called business administration. If you're specifically interested in the financial side of it, it's covered by corporate finance.

IlliniDave
Posts: 3845
Joined: Wed Apr 02, 2014 7:46 pm

Re: Where are a company's profits invested?

Post by IlliniDave »

In my days in the Megacorp world and N=2 observations reinvested profits (net of taxes, debt service, etc.) were primarily invested into new/updated plant and equipment, business efficiency processes/initiatives, and employees (education, pay increases, profit sharing bonuses, etc.). The last and smallest slice was R&D. Of course, many of those are temporary investments which would be rolled into future overhead rates and pricing, and/or new sales. As much as possible both megacorps I observed invested with the expectation of recouping costs and realizing a net positive return on the investment. Things didn't go well for those involved when a company-funded investment flopped.

Crusader
Posts: 342
Joined: Wed Aug 19, 2020 11:16 pm
Location: Toronto, Canada

Re: Where are a company's profits invested?

Post by Crusader »

To add to what jacob said, they can also be used to buy back your own company's shares (if you don't think your business will grow). This will reduce the shares of the company and increase the earnings per share, with the same earnings, and will decrease the amount of dividends the business is expected to pay in the future.

lillo9546
Posts: 136
Joined: Sun May 22, 2022 12:17 pm
Location: Italy

Re: Where are a company's profits invested?

Post by lillo9546 »

What if the business is a small business, and not a megacorp with stock options?

jacob
Site Admin
Posts: 15907
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 77
Contact:

Re: Where are a company's profits invested?

Post by jacob »

lillo9546 wrote:
Sun Feb 12, 2023 11:58 am
What if the business is a small business, and not a megacorp with stock options?
Don't worry about that until you understand the difference between profit and earnings.

7Wannabe5
Posts: 9369
Joined: Fri Oct 18, 2013 9:03 am

Re: Where are a company's profits invested?

Post by 7Wannabe5 »

lillo9546 wrote:Is there a branch, or a field of study, that has been learning the dynamics of this process since the beginning of human history, which therefore also transcends the invention of "money", the fiat currency, as we know it today?
Sexual reproduction.

liberty
Posts: 180
Joined: Mon Nov 21, 2016 2:01 pm
Location: Norway

Re: Where are a company's profits invested?

Post by liberty »

jacob wrote:
Sun Feb 12, 2023 12:33 pm
Don't worry about that until you understand the difference between profit and earnings.
It's the same thing?!

lillo9546
Posts: 136
Joined: Sun May 22, 2022 12:17 pm
Location: Italy

Re: Where are a company's profits invested?

Post by lillo9546 »

Sorry but I come from a differnt country.
Here there is "Fatturato" which i think translate in "revenue"
then "Margine Lordo" -> "Operating Income?"
then "Utile Netto" -> "Net Income"?

It's really easy to miss :)

mathiverse
Posts: 788
Joined: Fri Feb 01, 2019 8:40 pm

Re: Where are a company's profits invested?

Post by mathiverse »

jacob wrote:
Sun Feb 12, 2023 9:38 am
Read this: https://www.amazon.com/Accounting-Game- ... B001U29UIU
This book was great for anyone with very little or no knowledge about financial statements and how businesses operate financially. I learned the basics of accounting including how to understand everything in the following paragraph and the difference between profit and earnings. It gives examples of answers to OP's question, too. The best part was all of the practice built into the book. I had previously read a layman's introduction to financial statements that was useful, but I didn't get very good at seeing the connections between business transactions and the financial statements due to that book not breaking down the process in as much detail as The Accounting Game. Good stuff.

Post Reply