capital that its shareholders have actually put into the business or have had put in for them by the Board. It also pleases and cheers the shareholders and makes some of them think that they are better off, and reconciles them to seeing the Board building up the reserves in later years, and so continuing the process by which their property and earning power are expanded.
Some companies can achieve the same result—an increase of capital through the channel of reserve funds—by issuing shares, to their own shareholders or to the public, at a premium. It goes without saying that in order to do so their shares must stand high in the market.
We thus find that though the profits shown as earned by a company are, as a test of its position, full of misleading uncertainties, the use that the Board makes of the profit declared has some significance. We are in touch with definite fact when we ask how much of the profit remaining after meeting all charges, including preference dividend, is paid away in dividend and how much is put to reserve or added to the amount carried forward.
In its quarterly examination of the profits of industrial companies the Economist works out the proportion of profit put to reserve.
