Talk:Return of capital/Archives/2012

Shrinking the business?

This article states that a return of capital "effectively shrinks the business". Does this always apply? It is honestly not clear to me. For example, a REIT (or even a single property) may have a fixed amount of e.g. rental income. Withdrawing equity would not seem to shrink the business - unless by 'business' net assets/equity is what is meant. Or if the baseline for comparison is potential future growth - which would theoretically apply to any equity withdrawal, including dividends. Grateful for explanation of the reasoning here. I'm not disputing, of course, that return of capital may in some cases constitute shrinking of the business right up to liquidation/unwinding, it just may not apply in all cases.--Gregalton 12:30, 30 January 2007 (UTC)

The current edit simply changes this to mean that "shrinking the business" means "shrinking the equity". If this is what is meant, isn't it a truism? (At least in the accounting sense). "Distributing equity to shareholders reduces the corporation's equity." Grateful for clarification if something else is meant.

And of course, by this definition, a return of capital always shrinks the business, as I stated above.--Gregalton 03:40, 31 January 2007 (UTC)

Spend the time working through the example at the end. The business shrinks when distributions exceed income earned (the definition of ROC). You might not know it until the long-lived assets have to be replaced 20 years down the line, but it is still shrinking. Of course the difference between a dividend and a ROC all depends on when the earnings are earned. If you distribute last year's earnings, then the distribution is technically a ROC - even if there is only a month's lag. The point of ROC is that earnings measured growth. Taking assets out that exceed that growth results in the business shrinking.207.102.255.233 21:05, 10 February 2007 (UTC)

All I am trying to get across are two questions/points; the first one is simply a clarification of terminology, the second a wee bit more involved: 1) To say "shrinking the business is vague (does it mean revenue? Equity? Assets? Brand awareness?). It would be preferable to have a term that is precise, given the fairly precise definition of ROC. In the current first paragraph, it specifies that it is a distribution of equity (as you rightfully point out, this year's income, previous years' income, invested equity, it's all equity).

2) I have worked through and understand the example below. I don't dispute the specific example, but whether it always applies in the conclusion. For example, a company that faces investment choices that have returns lower than cost of capital would be reducing future earnings by making that investment. Or, put differently, the unstated assumption in the formulation is that profitable investment opportunities are available and feasible that can improve future earnings. At any rate, all I am trying to get at is that "shrinks the business" seems vague and imprecise (and possibly not NPOV), and there may be a better way to formulate. Open to suggestions.--Gregalton 21:40, 10 February 2007 (UTC)

One more quick point: you wrote in reverting to the "business" version: "shrinking is not a bookkeeping effect - it is an economic effect". I agree completely - but reducing equity/cash is of course an economic effect. Saying it reduces equity does not imply it is simply "bookkeeping". Of course, if you'd like to specify that it reduces cash as well, fair enough.--Gregalton 22:43, 10 February 2007 (UTC)

1) Your definitions of 'business' are preposterous. A business is the totality of the assets, the goodwill, the people.

2) Having a choice of investments, and how the returns compare is completely irrelevant to either the definition of ROC or any description of its effects. Your statement that there is an assumption in the example is untrue. The example involves no choices.

3) Since you don't know what a company is, why are you wasting all our time with extraneous issues? 207.102.255.233 22:53, 11 February 2007 (UTC)

Evidently no point attempting to have an exchange of views on this if you can't discuss politely. I didn't define business, I asked what definition was meant. If you think precision extraneous, and are pleased with your facile answer, then there certainly is no need to question or clarify assumptions (there are always assumptions), or, indeed, learn anything.--Gregalton 08:04, 12 February 2007 (UTC)

As a non-finance person, this article is very well written, and the example is enlightening. As a non-party to the discussion, my take is that the example is just that, that other companies will differ in detial, and that return of capital has the special meaning and implications discussed. This concept has some subtlety to it. I was specifically interested because I own shares in a pipeline limited partnership that pays out returns of capital. I appreciate the use of common English in the description. Thanks! Kd4ttc (talk) 21:30, 2 March 2011 (UTC)