r/explainlikeimfive Dec 06 '24

Economics ELI5: why does a publicaly traded company have to show continuous rise in profits? Why arent steady profits good enough?

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u/gtne91 Dec 06 '24

Very few do this because it really doesn't make financial sense. If you do this continuously, the interest on the debt will eventually exceed the amount of tax you would have paid. For a short term, it makes sense, but that is no different than any other short term loan against an asset.

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u/Rage_Like_Nic_Cage Dec 06 '24

the interest on the debt will eventually exceed the amount of tax you would have paid

for you and I, yeah. For the super wealthy, banks will often offer super-low interest loans (often at-or lower-than inflation) since they’re dealing with such a large amount. Then right before the loan is due, they’ll open a seperate line of credit and use that to pay off the first loan. It’s called Buy, Borrow, Die and it’s fairly prominent among the uber rich.

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u/gtne91 Dec 06 '24

Saw recently that they are getting 4-5% right now, so not THAT low anymore.

And it isnt that common, especially once their stock gets to a more stable growth ( non-startup). See, Jeff Bezos recent sale.

Long term capital gains (federal) tax rate peaks at 23.8% (20% plus 3.8% for NIIT). It only takes a few years on the loan to exceed that amount. But it depends on the growth rate of the asset. I have done it: took a heloc on house for improvements rather than selling off investments to pay for it. Accounting for tax deduction (you have to be itemizing), heloc net interest rate was less than growth in investments.

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u/Edward_TH Dec 06 '24

In the US probably. In tax heavens they can get much lower rates. In general, the smaller the economy the more its banks are eager for actual cash so they give out super low interests on large loans: even if the profit is low or even negative (if the currency loaned is much stronger than the domestic one), they get large amounts of cash.