SOS Economics

How do we explain the current US economy crisis?

Let me start by saying, a company or a country need "capital + borrowings" = investment = profit + dividends

If we notice, the debt in US increased a lot faster than the US corporate earnings over the last 10 years. Get this statistics, google up the increased earnings and divided by increased in debt, you will realised, the ratio is deteriorating,

In a company we measure return on equity/capital for shareholders return, if we want to measures the real return we use earnings over capital + borrowings (borrowings is a capital with interest and repayment)

Normally in the equity market, we expect return on equity of about 10% to 15% p.a. One should also measure if there are any increase in debt or borrowings, because debt is a type of capital. if the return over capital+debt is shrinking over the years, that means the fundamental of the company is deteriorating.

So, when someone start a business, say 30mil capital + 70mil debt capital, the profit after tax and interest less principal repayment of debt, over capital is the real return on equity.

PAT-repayment of loan/capital = real return on equity