Comment, question or quotation of the day

19-03-2023 : Greed and short-sightedness.


In a recent article entitled How start-ups should manage their finances, we read the testimony of two confident entrepreneurs: "When you have at least 1 or 2 million in cash, you can invest it in US Treasury Bonds. At the moment they are paying 5%! This will give you a free runaway. "We bought US Treasuries a while ago. There is little chance that the US Treasury will default. If not, the world will be in big trouble."

We don't dispute that the world would be in big trouble if the US Treasury defaulted, and that this is very unlikely. 

We find, in our dual role as educators and investors, including in start-ups, that it is a very bad idea for a European start-up to invest its cash in dollars. The only case where this might make sense is if the start-up has debt in dollars or makes significant purchases denominated in dollars, so as to constitute a natural hedge against currency risk, which should not concern many European start-ups since they rarely have debt, and even less in dollars!

Why is this a bad idea? Because in order to get 5% on US Treasury bonds, you have to buy a two-year paper, which only yields 4.4%, whereas French Treasury bonds currently yield 2.7%. So for a rate differential of 1.7%, the company takes a currency risk on the dollar. If the dollar falls by 1.7% against the euro in one year, the gain in the return on the dollar Treasury bill against the same maturity in euro is wiped out. A fall of 1.7% means that the euro falls from its current rate of $1.06 to $1.08. When you consider that the dollar has fluctuated between 0.96 and 1.4 over the last 10 years, you can see that a variation of at least 1.7% in one year is a possibility ... if not a certainty.

But there is not only currency risk, there is also interest rate risk. If in a year's time US one-year interest rates have risen to 6.2%, because inflation is finally higher than expected and our start-up needs the funds, it will sell its treasury bills at a loss, at a constant exchange rate, erasing the difference in yield.

We wish good luck and a lot of courage to these apprentice treasurers to go and announce their brilliant idea to their governance committee, or even, when the time comes, the possible disaster of an investment that would have lost 10% of its value with a dollar at 1.17, especially in the context of a rising tug-of-war between the Democrats and the Republicans on raising the ceiling of the US government debt. ... In any case, we have advised start-ups that have put their trust in us by welcoming us to their capital and their governance committee to invest wisely in euros and to focus on operations. 


Have a nice day.

12-03-2023 : Are large groups pushing up inflation?

We don't think so in Europe, but we wouldn't say the same thing in the US.

If the large groups, which in France are summarised as the CAC 40, were to feed inflation by increasing their selling prices more strongly than is justified by the rise in their production costs and the maintenance of their margins, we should see their results rise faster than their turnover, thus showing an increase in margins.

However, when we look at the 2022 results of the 38 CAC40 companies (which close on 31 December), two thirds of them have a growth in results that is lower than the growth in turnover, implying a fall in their margins: Thus, by way of illustration for products that contribute to the daily life of consumers who may have this suspicion: Carrefour: + 16% for turnover and + 8% for results, Danone + 14% and + 1%, Crédit Agricole: + 3% and -7%, Michelin: + 20% and + 9%.

Among the 13 groups whose results grew faster than sales, we find, for example, Hermès: +29% and +38%, Safran +25% and +55%, Dassault Systèmes: +17% and +20%, whose activities are not remotely or closely related to the household basket and are therefore not likely to inflate inflation significantly.

In the United States, where competitive pressure has diminished since the 2000s, and where, for example, a telephone package costs around €60 per month compared with €20 in France, with 3 national operators compared with 4 in France, the situation is likely to be different. 

Have a nice day



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The Letter

Number 148 of February 2023

News : Do share buybacks boost stock prices?

Statistics : 700 years of interest rates

Research : Talent retention as a determinant of capital structure

Q&A : Is the cost of capital of a monopoly activity different from that of the same activity in competition?

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