> If you take out a loan from a bank, the bank expects 5% annual return on that loan. Where do you get the additional 5% that you owe?
This has a lot of implicit assumptions which don’t hold true in reality. The 5% would have to be the same as the return on equity prior to the loan, and the loan would have to be for the full amount of the equity.
What I said above is that you can have a stable business with a decent return without needing to grow the business.
Say you have a business with $10 million in sales, and a net profit margin of 15%, so you take out $1.5 million per year. In my mind this is a great business.
1. To your specific point re a loan, this could easily support a $4 million load at 8% without demanding the underlying business grow revenues at all.
2. Lots of people would be tempted to grow the top line to $100 million even if net margins shrank to 5%. This is the point I don’t understand. Is it just greed? The consequence is that, in the aggregate across the economy, businesses and people rarely become businesses like OP points out and usually end up doing a lot of shitty things that destroy any lasting brand value or loyalty. I’m looking at Google Search and Facebook, and a million other businesses in and out of tech when I say this.
This has a lot of implicit assumptions which don’t hold true in reality. The 5% would have to be the same as the return on equity prior to the loan, and the loan would have to be for the full amount of the equity.
What I said above is that you can have a stable business with a decent return without needing to grow the business.
Say you have a business with $10 million in sales, and a net profit margin of 15%, so you take out $1.5 million per year. In my mind this is a great business.
1. To your specific point re a loan, this could easily support a $4 million load at 8% without demanding the underlying business grow revenues at all.
2. Lots of people would be tempted to grow the top line to $100 million even if net margins shrank to 5%. This is the point I don’t understand. Is it just greed? The consequence is that, in the aggregate across the economy, businesses and people rarely become businesses like OP points out and usually end up doing a lot of shitty things that destroy any lasting brand value or loyalty. I’m looking at Google Search and Facebook, and a million other businesses in and out of tech when I say this.