Even though shareholders are owners of the company, it is not the shareholder looking into day-to-day operations. It is the management. Shareholders may appoint Director to check whether the administration is doing its duty or not.

Some decisions are essential for the Future of the Company. In short-term as well as long-term. Making Profit is one, but EFFECTIVE utilization of Profit is another decision that holds power to ruin the Party.

What to do with earnings is largely decided per the life of the company, the sector in which it operates, Future growth, etc.

There are three ways how management may utilize the earnings.

  1. Reinvestment of earnings in the company or Buyback. As per Peter Lynch, Buyback is the same as reinvestment. Very Good decision for Many technology, E-Commerce companies, and Startups. It will reduce the need for Debt, giving the company less leverage.
  2. Buying another company. May reduce the competition or cost if the target company is the supplier. They are called backward integration. But if the decision is taken at the wrong Time or the amount paid for Assets, then Goodwill may look heavy on the Balance Sheet. Acquirer may not receive information about Balance Sheet assets if the acquisition is hostiles.
  3. Giving Dividend.

As per Warren Buffett, only one option is Rational. That is third.

There are many reasons why he thinks like that. But the most important is maybe it proves that management is not cooking the Balance Sheet and that the growth is REAL and Tangible.