水不恋云    复制

105-The Purpose of a Company [Morning Start]
  Course 105:
  The Purpose of a Company
  It's worth repeating that when you hold a stock, you own part of a company.
  Part of being an owner is understanding the financial underpinnings of any
  given business, and this lesson will provide an introduction.
  
  The main purpose of a company is to take money from investors (their creditors
  and shareholders) and generate profits on their investments. Creditors and
  shareholders carry different risks with their investments, and thus they have
  different return opportunities. Creditors bear less risk and receive a fixed
  return regardless of a company's performance (unless the firm defaults).
  Shareholders carry all the risks of ownership, and their return depends on a
  company's underlying business performance. When companies generate lots of
  profits, shareholders stand to benefit the most.
  
  As we learned in Lesson 101, at the end of the day, investors have many
  choices about where to put their money; they can invest it into savings
  accounts, government bonds, stocks, or other investment vehicles. In each,
  investors expect a return on their investment. Stocks represent ownership
  interests in companies that are expected to create value with the money that
  is invested in them by their owners.
  
  
  Money In and Money Out
  Companies need money to operate and grow their businesses in order to generate
  returns for their investors. Investors put money--called capital--into a
  company, and then it is the company's responsibility to create additional
  money--called profits--for investors. The ratio of the profit to the capital
  is called the return on capital. It is important to remember that the absolute
  level of profits in dollar terms is less important than profit as a percentage
  of the capital invested.
  
  For example, a company may make $1 billion in profits for a given year, but it
  may have taken $20 billion worth of capital to do so, creating a meager 5%
  return on capital. This particular company is not very profitable. Another
  firm may generate just $100 million in profits but only need $500 million to
  do so, boasting a 20% return on capital. This company is highly profitable. A
  return on capital of 20% means that for every $1.00 that investors put into
  the company, the company earns $0.20 per year.
  
  
  The Two Types of Capital
  Before discussing return on capital further, it is important to distinguish
  between the two types of capital. As we mentioned above, two types of
  investors invest capital into companies: creditors ("loaners") and
  shareholders ("owners"). Creditors provide a company with debt capital, and
  shareholders provide a company with equity capital.
  
  Creditors are typically banks, bondholders, and suppliers. They lend money to
  companies in exchange for a fixed return on their debt capital, usually in the
  form of interest payments. Companies also agree to pay back the principal on
  their loans.
  
  The interest rate will be higher than the interest rate of government bonds,
  because companies generally have a higher risk of defaulting on their interest
  payments and principal. Lenders generally require a return on their loans that
  is commensurate with the risks associated with the individual company.
  Therefore, a steady company will borrow money cheaply (lower interest
  payments), but a risky business will have to pay more (higher interest
  payments).
  
  Shareholders that supply companies with equity capital are typically banks,
  mutual or hedge funds, and private investors. They give money to a company in
  exchange for an ownership interest in that business. Unlike creditors,
  shareholders do not get a fixed return on their investment because they are
  part owners of the company. When a company sells shares to the public (in
  other words, "goes public" to be "publicly traded"), it is actually selling an
  ownership stake in itself and not a promise to pay a fixed amount each year.
  
  Shareholders are entitled to the profits, if any, generated by the company
  after everyone else--employees, vendors, lenders--gets paid. The more shares
  you own, the greater your claim on these profits and potential dividends.
  Owners have potentially unlimited upside profits, but they could also lose
  their entire investment if the company fails.
  
  It is also important to keep in mind a company's total number of shares
  outstanding at any given time. Shareholders can benefit more from owning one
  share of a billion-dollar company that has only 100 shares (a 1% ownership
  interest) than by owning 100 shares of a billion-dollar company that has a
  million shares outstanding (a 0.01% ownership interest).
  
  
  Once a Profit Is Created...
  Companies usually pay out their profits in the form of dividends, or they
  reinvest the money back into the business. Dividends provide shareholders with
  a cash payment, and reinvested earnings offer shareholders the chance to
  receive more profits from the underlying business in the future. Many
  companies, especially young ones, pay no dividends. Any profits they make are
  plowed back into their businesses. One of the most important jobs of any
  company's management is to decide whether to pay out profits as dividends or
  to reinvest the money back into the business. Companies that care about
  shareholders will reinvest the money only if they have promising opportunities
  to invest in--opportunities that should earn a higher return than shareholders
  could get on their own.
  
  
  Different Capital, Different Risk, Different Return
  Debt and equity capital each have different risk profiles. Therefore, as we
  showed in Lesson 103, each type of capital offers investors different return
  opportunities. Creditors shoulder less risk than shareholders because they are
  accepting a lower rate of return on the debt capital they supply to a company.
  When a company pays out the profits generated each year, creditors are paid
  before anyone else. Creditors can break up a company if it does not have
  sufficient money to cover its interest payments, and they wield a big stick.
  
  Consequently, companies understand that there is a big difference between
  borrowing money from creditors and raising money from shareholders. If a firm
  is unable to pay the interest on a corporate bond or the principal when it
  comes due, the company is bankrupt. The creditors can then come in and divvy
  up the firm's assets in order to recover whatever they can from their
  investments. Any assets left over after the creditors are done belong to
  shareholders, but often such leftovers do not amount to much, if anything at
  all.
  
  Shareholders take on more risk than creditors because they only get the
  profits left over after everyone else gets paid. If nothing is left over, they
  receive nothing in return. They are the "residual" claimants to a company's
  profits. However, there is an important trade-off. If a company generates lots
  of profits, shareholders enjoy the highest returns. The sky is the limit for
  owners and their profits. Meanwhile, loaners keep receiving the same interest
  payment year in and year out, regardless of how high the company's profits may
  reach. By contrast, owners keep whatever profits are left over. And the more
  that is left over, the higher their return on capital.
  
  
  Return on Capital and Return on Stock
  The market often takes a long time to reward shareholders with a return on
  stock that corresponds to a company's return on capital. To better understand
  this statement, it is crucial to separate return on capital from return on
  stock. Return on capital is a measure of a company's profitability, but return
  on stock represents a combination of dividends and increases in the stock
  price (better known as capital gains). The two simple formulas below outline
  the return calculations in more detail:
  
  Return on Capital: Profit / (Invested Capital)
  Return on Stock: Shareholder Total Return = Capital Gains Dividends
  
  The market frequently forgets the important relationship between return on
  capital and return on stock. A company can earn a high return on capital but
  shareholders could still suffer if the market price of the stock decreases
  over the same period. Similarly, a terrible company with a low return on
  capital may see its stock price increase if the firm performed less terribly
  than the market had expected. Or maybe the company is currently losing lots of
  money, but investors have bid up its stock in anticipation of future profits.
  
  In other words, in the short term, there can be a disconnect between how a
  company performs and how its stock performs. This is because a stock's market
  price is a function of the market's perception of the value of the future
  profits a company can create. Sometimes this perception is spot on; sometimes
  it is way off the mark. But over a longer period of time, the market tends to
  get it right, and the performance of a company's stock will mirror the
  performance of the underlying business.
  
  
  The Voting and Weighing Machines
  The father of value investing, Benjamin Graham, explained this concept by
  saying that in the short run, the market is like a voting machine--tallying up
  which firms are popular and unpopular. But in the long run, the market is like
  a weighing machine--assessing the substance of a company. The message is
  clear: What matters in the long run is a company's actual underlying business
  performance and not the investing public's fickle opinion about its prospects
  in the short run.
  
  Over the long term, when companies perform well, their shares will do so, too.
  And when a company's business suffers, the stock will also suffer. For
  example, Starbucks has had phenomenal success at turning coffee--a simple
  product that used to be practically given away--into a premium product that
  people are willing to pay up for. Starbucks has enjoyed handsome growth in
  number of stores, profits, and share price. Starbucks also has a respectable
  return on capital of near 11% today.
  
  Meanwhile, Sears has languished. It has had a difficult time competing with
  discount stores and strip malls, and it has not enjoyed any meaningful profit
  growth in years. Plus, its return on capital rarely tops 5%. As a result, its
  stock has bounced around without really going anywhere in decades.
  
  
  The Bottom Line
  In the end, stocks are ownership interests in companies. We can't emphasize
  this fact enough. Being a stockholder is being a partial owner of a company.
  
  Over the long term, a company's business performance and its stock price will
  converge. The market rewards companies that earn high returns on capital over
  a long period. Companies that earn low returns may get an occasional bounce in
  the short term, but their long-term performance will be just as miserable as
  their returns on capital. The wealth a company creates--as measured by returns
  on capital--will find its way to shareholders over the long term in the form
  of dividends or stock appreciation.