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Profit: The entrepreneurial view

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Summary

The economic developments leading to the actual profit squeeze are described. A marked decline is found in the share of other income (which includes capital income) and also in returns on capital employed in various manufacturing industries between 1954 and 1978. The minimum profit rate, defined as critical profitability, is analysed. For companies wishing to maintain a 50/50 ratio between own capital and loan capital, a critical profit rate of 13% for December 1979 was calculated. This figure is based on an earnings yield of 14.5% on share capital (price/earning ratio 6.9%) and an interest rate on government bonds of 9.3%. This profit rate is the minimal required to attract capital at the rates demanded by the investors. The present critical profit rate is much higher than the average return on capital employed as calculated in this article.

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References

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Authors
  1. D. M. N. van Wensveen
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Additional information

The author is Chairman of the Managing Board of Bank Mees & Hope N.V., but wrote this article under his personal responsibility. He owes a debt of gratitude to Drs. P. A. Geljon, Head of the Economic and Securities Research Department of Bank Mees & Hope N.V. for his contribution to the preparation of this article. Any shortcomings remain of course for the author's own account.

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van Wensveen, D.M.N. Profit: The entrepreneurial view. De Economist 128, 315–343 (1980). https://doi.org/10.1007/BF01423533

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  • DOI: https://doi.org/10.1007/BF01423533

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