1. Profit/loss measures changes in equity resulting from operating activity, as opposed to financing activities (which just rearrange how the company is financed).
2. Examples of financing activities are taking out (or paying back) loans, issuing (or buying back) shares, and issuing dividends.
3. Some (not all, as you point out!) of those financing activities will increase or decrease equity. So, when thinking about profit as the rate of change of book value, you should be careful add back any changes that are the result of financing activities. (specifically: ignore changes in equity due to money going to, or coming from, shareholders)
1. Profit/loss measures changes in equity resulting from operating activity, as opposed to financing activities (which just rearrange how the company is financed).
2. Examples of financing activities are taking out (or paying back) loans, issuing (or buying back) shares, and issuing dividends.
3. Some (not all, as you point out!) of those financing activities will increase or decrease equity. So, when thinking about profit as the rate of change of book value, you should be careful add back any changes that are the result of financing activities. (specifically: ignore changes in equity due to money going to, or coming from, shareholders)
reply