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sir what does a negative residual profit indicate? that the the company has paid dividends beyond FCF to equity available?
No. By law dividends can only be paid out of retained earnings. Where the cash comes from is not relevant.
so then how do we comment on a negative residual profit figure?
using retained earnings to fund dividends is normal. but we gotta to have some point to criticise the negative residual profit figure.
sir can we say that high residual profits mean that the company is not reinvesting into capital assets as much as it can?
It is a statement of fact that the more they are distributing as dividend then the less they are reinvesting!! That does not mean it is good or bad or should be criticised – it depends on the reasons and the policies of the company.
Most companies will want a policy of dividend growth and this can only be achieved in the long term by retaining and reinvesting – the more the retention the more the growth.
At the same time, most large companies will have a policy of growing dividends and in years when profit are low might still keep growing the dividend in order to keep investors satisfied even if some year that means the dividend is higher than the distributable profits.This is all Paper FM. The only difference in Paper AFM is that you are expected to analyse what is happening and make comments on the policy and decisions of the company – just as you would be expected to in real life.
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