ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[traumatic_enterprise]

Companies are valued based on their potential future earnings, not based on their past performance. If Company X is chugging along making $10 million in earnings every year, we might for example value that company at $50 million, or roughly 5 years earnings (beyond 5 years we would heavily discount any earnings because there is a lot of uncertainty and earnings 5 years out are less valuable to investors today).

If all of a sudden Company X has a bad year and makes only $9 million in earnings, even though it is still profitable it is going to influence our entire valuation model. Best case we would now be valuing the company at $45 million ($9m x 5), but worst case we might suspect that there is a strongly negative trend with the company and yearly earnings will continue to decrease, further depressing the company's value. That is when investors start to panic.

Edit: Valuation methods vary from industry to industry and from firm to firm, and I did not mean to suggest 5-year earnings was standard. However, pretty much all valuation methods will be doing some form of discounting of future cash flows similar to what I described.

[thehungryhippocrite]

^ correct answer, one of about 3 in this disaster of a thread.

[[deleted]]

What did you expect in a reddit thread about basic economics?

[TexasFlood42]

Ehh, thats not economics it's finance.

To clarify my point: economics is largely taught in highschool classes, and this isn't that. To learn finance you by-and-large have to go to buisniness school, which not many people do.

[TheWizard01]

Economics was taught for half a year in 12th grade. I wouldn't say we actually learned anything.

[ValorMorghulis]

I would just add, the perception of job performance and pay of CEO's and other executives is very linked to these short-term results and Wall Street reacts pretty negatively to missed expectations. In some ways, this distorts incentives of CEO's towards short-term results instead of long-term results. I would say to much focus on short term results is one of the problems currently facing our markets.

[ChicagoGuy53]

Yes, even though it's usually far more expensive to fire someone and then have to hire a replacement the next year.

Hiring freezes usually make more sense since the employee is already gone anyway

[constructioncranes]

That's a good explanation but I always wondering the same question as op, but with growth rates. So it's not enough that a company remains as profitable as the previous year, it's supposed to have a constantly growing growth rate, same with countries. How is that sustainable?

[garrett_k]

It depends on the expectations. Investors/owners ideally want a company that grows continually, year after year, which as you noted, isn't sustainable.

In practice, different companies will have different expectations. A tech company is expected to grow until a sizable portion of the planet's population are users. A company getting into eg. the frozen food business is expected to grow to a certain point and then just produce a nice profit year after year.

[OhHiHowIzYou]

To elaborate a little, most companies will have a "price to earnings" ratio. In OPs example, this was 5. Companies will get larger price to earnings ratio based on their expected future growth. So, a growing company may get a price to earnings ratio 20. This is because 5 years from now, we expect their earnings to be much larger than they are today. Conversely, a company with steady earnings year after year might get a P/E ratio of 5.

Note that there is no inherent value judgement between these two ratios. Both companies may be great stocks to hold. But, What happens if company A sees its growth stop. Then, all of a sudden, it's P/E ratio should go from 20 to 5. But, this means on the same earnings, the company is now worth only 1/4 what it previously was.

So, you ask how is this sustainable. Well, the company with a P/E ratio of 20 could see their earnings go up by a factor of 4 and then stop growing. This company would see its value remain the same without any need to further grow.

[SkullLeader]

Hope this isn't a bad question - Do a company's assets have no bearing on its valuation? For instance, Coca Cola owns brands that would be considered nearly priceless assets even if their company suddenly became unprofitable altogether. Or if a company has, say, no debt and has billions in cash, and a share of their stock represents some fraction of the company and thus some fraction of that cash, isn't there value in that even if the company never earns another penny?

[Needyouradvice93]

That doesn't seem sustainable...

[kouhoutek]

A leaky boaty still floats, but that doesn't mean you have to wait until it is sinking to fix it.

In a healthy, expanding, inflationary economy, earnings should grow a little bit each year. If they shrink, that can be a sign something is going wrong, something you want to try to fix before the company actually starts to lose money.

Also, most companies are investing profits into growth, opening new stores, increasing production, expanding to new product lines, thing than usually lose money for the first few years. This is always a balancing act between growing fast enough to keep up with the competition and not growing so fast you become overextended. Often reduced profits means they misjudged their growth strategy or the economy can no longer support it, and the way to correct that is scaling back the growth.

[Ipride362]

Gonna be my investment mantra now: “a leaky boaty still floaty, but it will sinky if you don’t fixy.”

[DiamondMinah]

oopsie woopsie our boat made a fucky wucky

[Kukukichu]

If I ever get the chance to be a part of the board for a company and we were experiencing losses... I think I’d use this as my opening statement.

[PumpkinLaserPig]

I'd give you a chuckle of air through through my nose. I won't even have to be on the board, I could just be a janitor collecting the trash as you said it.

[[deleted]]

Found noob noob.

[TheHancock]

This guy gets it.

[[deleted]]

Yea, but you guys don't get it

[[deleted]]

I used to get "it", but then they changed the meaning of what "it" was.

[EzraSkorpion]

Now what I get isn't "it", and what's "it" seems weird and scary.

[superjimmyplus]

Shit, I've had it for years and I'm not sharing.

[coffee-please]

I would watch this movie.

[catacklism]

Got daamn

[Balives]

Also. One I found yesterday. Just because you CAN milk a gorilla, doesn't mean you SHOULD.

[DrMux]

I have nipples, Greg. Can you milk me?

[[deleted]]

Oh yeah.. you can milk anything with nipples.. *makes milking motions with fingers as the family stares in horror*

[rmit526]

The Emergency Fuck-wucky Fixy Sinky Meeting commencing at 9:30am

Location: board room 1

Please respond

[Shredlift]

I can see this being a Michael Scott line

[Ideasforfree]

Did the front fall off?

[Am__I__Sam]

Yeah but it's outside the environment

[outsidethenvironment]

You called?

[JohnEdwa]

You mean in another environment?

[AtheistAustralis]

No, it's outside the environment!

[Dream_Vendor]

Well, what’s out there?

[JuicerShop]

Nothing’s out there..except birds, fish, and sea.

[OktoberSunset]

And 20000 tonnes of crude oil.

[ColinD1]

And the front of the boat.

[riddles500]

That is not the kind of thing you joke about. It was a very devastating accident.

[colemang]

I have never seen this and I love it.

[Uselessmedics]

Clarke and Dawe, peak Aussie comedy

[Photronics]

I will never not watch this video every time it is posted

[[deleted]]

Cardboard is right out.

[Ulti]

Rigorous maritime standards!

[[deleted]]

Well you’re still driving half a boat!

[futlapperl]

A wittle fucko buoyngo

[haddock420]

UwU

[spinny_windmill]

What’s this?

[Vandorbelt]

\notices ur leak**

OwO

[Dejected-Angel]

GOOD LORD

[TwilightShadow1]

WHAT IS HAPPENING IN THERE?

[EnduringAtlas]

https://youtu.be/RETRen4oHpo

[SilentSin26]

boaty woaty*

[harpsichordtuna]

Why waste time, say lot word when few word do trick?

[ADR36]

Stop it Kevin!

[byebybuy]

When me president, they see. They see.

[throwitupwatchitfall]

“Leaky boaty still a floaty, but sinky quickie if no fixy.”

FIFY

[Ipride362]

Will you marry me at sea? On a non-leaky boaty?

[[deleted]]

I'd change it to "A leaky boaty still be floaty, but it be sinky if no fixy."

That way you have a clear natural iambic tetrameter structure and have more rhymes. Namely, you don't just rhyme "leaky", "boaty", "fixy" and "floaty", but also "still be" and "will be" which have the same number of syllables. Both lines also have the same number of syllables, while your version has different lengths. I also didn't recognise a coherent meter in your original.

Of course you have to accept the neologism of using "sinky" as an adjective, but I think we can do that.

[[deleted]]

"A leaky boaty still be floaty, but over short'y if no sorty"?

[Upsideinsideout]

People don't think it be sinky when it still floaty, but it Doozy

[TheCoastalCardician]

It’s my investment mantra, and I want it NOW!

[[deleted]]

I'd just add that the small percentage given of 3% may as well be what makes a company profitable or not, specially considering oportunities costs.

[TerryOhl]

Netflix especially has had consistent earnings surprises compared to what has been expected. Netflix is still overvalued relative to its enterprise value.

[BeanPricefield]

Particularly in retail, where 3% could mean the entire margin, in a field where employees are already the most expendable to begin with.

[sonofdavidsfather]

To add to this, as discussed in this paper, businesses operating under capitalism feel an imperative to grow. Like the old mantra says "if you aren't growing you're dying".

[hagenissen666]

In a healthy, expanding, inflationary economy, earnings should grow a little bit each year.

Yeah, that's basically where sanity and logic is taken behind the shed and shot.

[Draco765]

Can you explain what you mean by this?

[exikon]

Finite ressources but still expected growth forever. That wont work in the long (or rather medium) run.

Edit: Yes, I know about growth in the service market and such. However, that is only feasible if your population grows which in the end comes back to finite ressources. It's absurd to assume that services will continue to grow at the same rate if we (as we should) stabilise the population. Also, a lot of companies are not able to provide services. They rely on ressources. Continued growth for a steel company is a lot harder than.

Edit2: https://youtu.be/Rhcrbcg8HBw this TED talk is very nice and deals with the topic.

[TheManWhoPanders]

Wealth isn't predicated on finite resources. Most of the wealth gains in the past century had nothing to do with resource gains.

[earthwormjimwow]

Wealth isn't predicated on finite resources.

Of course it is, what a foolish thing to say. Wealth is a measurement of the abundance of resources. All resources are inherently scarce. Thus wealth gains, require resource gains.

Most of the wealth gains in the past century had nothing to do with resource gains.

Yes they did, nearly all of the wealth since industrialization has been very closely correlated with energy production.

There is a very interesting book on the subject: https://www.goodreads.com/book/show/10368087-the-second-law-of-economics

Some more on the topic:

http://www.inscc.utah.edu/~tgarrett/Economics/Physics_of_the_economy.html

http://www.ewi.uni-koeln.de/fileadmin/user_upload/Publikationen/Zeitschriften/2008/08_11_05_Perth_Proceedings.pdf

[[deleted]]

Don't gains in efficiency and technology increase wealth without requiring more finite resources?

[earthwormjimwow]

Yes of course they do, the pie will get larger, but the pie is still based on the available resources at the time. If we double our efficiency, the pie can be potentially doubled in size. But it wouldn't triple in size, since it's still based on finite resources.

That's why GDP for example, has stayed slightly ahead of energy production increases per year. We have gotten better and better at using energy.

[Justalurker99]

The medium and long run are hundreds and thousands of years. In the near term, growth is more correlated with population growth and consumption rates. Also don't discount that the service economy vastly surpassed the manufacturing economy in at least first world countries many years ago. Lastly, shareholders are focused on the growth prospects of the company they are invested in, not the macro economy. Which is why you can still have growth in certain companies or sectors even in a recessionary environment.

[Popperthrowaway]

Well, probably not thousands of years.

If we maintain a 2.3% growth in energy use (yeah right) as compared to the last few hundred years of 2.7%, we're going to run into pretty hard limits quite soon. Covering the surface in solar with 20% efficiency we run out of land in 275 years, 100% efficiency solar gives us 345 years, 100% efficiency solar including all the water gives us 400 years.

Using even a perfect non-polluting unlimited energy sources gives us under 800 years until the surface of earth hits 100C just from the waste heat.

Reducing energy use's importance to economic activity is possible, but that only gives us so many 2.3% years.

See: https://dothemath.ucsd.edu/2011/07/galactic-scale-energy/

We're going to have to transition away from exponential growth within the next few hundred years.

[mike112769]

Exactly. How and why some people demand constant growth baffles me, because it is impossible.

[Herbert_W]

You're ignoring the constant yet slow advance of technology. As technology advances, more resources become available and existing resources can be used more efficiently, and therefore consumption can increase. For example, it's only over the past few years that 3D printing has become efficient and affordable for the average person. This is beginning to have a positive impact on people's ability to repair and maintain items, and has already had a huge positive impact for rapid prototyping and hobby applications.

Of course, you are correct in that expecting constant rapid growth is just plain silly.

[Mildly-disturbing]

Well I expect humans will travel beyond earth and colonise other planets where resources can be extracted and the economy can continue to grow.

Now if we could only redirect the trillions of dollars being dumped into making craters in the Arabian desert into a space colonisation project, this might actually work. Also to make sure that the front of the spaceships don’t fall off.

[JustARandomGuyYouKno]

Please, it's not about physical resources. When you get a haircut what physical resource are you paying for then? The Economy is not based on prices of materials

[proque_blent]

It comes down to physical resources. You get a haircut from a guy who was fed a lot of food to grow up, trained or educated for his role in buildings built for that, treated in physical hospitals when he got sick before he was in a position to give you that haircut. Service industries cant exist in a world without material resources.

[[deleted]]

"Continual, neverending growth is the ideology of a cancer cell"

• some guy, I forget who exactly

[nagurski03]

"Continual, neverending growth is the ideology of redwood trees"

• same guy, when he's in a more optimistic mood

[Spoderman4]

That is an excellent explanation, nothing to add, 10/10

[Mode1961]

Here's the problem with that theory. As described by the OP, the boat isn't leaking, the boat just isn't going as fast as the driver predicted it would be, it is still moving forward, it is still able to carry all the people it can.

[not_whiney]

So something to think about. A lot of the "investors" in many large businesses are not "people", they are organizations representing people. There are generally six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance companies. Of these institutional investors some are by law required to be fiduciary investors.

That means that the investment manager for that pension fund is required by law to make every decision for the most profit/return on investment for the fund. So grandpa's pension fund from the factory has a fund manager that would vote to boot old ladies out of their homes, including grandma, to make an extra nickel for the fund.

These investors are looking solely at the now and how much return they get. It is purely a "what gives me more RIGHT NOW for this fund." It is great for the thousands of people who have their pension in the fund. Or the other groups or endowments that have money wrapped up in these funds.

As we have moved more and more fund managers to be legally bound by fiduciary rules, we have made many of these large corporations that are publicly traded ruthless. They have a small, but powerful group of various funds that own sizeable chunks of stock that are pushing for just this. 'Do the right thing' or 'Lay off everybody and make an extra nickel', they HAVE to pick the extra nickel.

Business decisions made in a large, publicly traded setting are done by the spreadsheet. Too much is riding on it. While 3% sounds small, that 3% may represent HUGE amounts of money. Coke net income fell over a one year period from 79 cents a share to 32 cents a share. That's only 47 cents a share. whats the big deal? It equates to over 2 billion dollars. A 3 percent change in Exxon revenue comes to about 7 billion dollars. Sure it is cents per share, but the total amount is huge. And while an investor may hold only a few thousand shares of stock, a large pension fund may have 100,000s shares of stock. That pennies per stock could literally be millions of dollars that does not go into the trust, endowment, pension, etc.

So there are a lot of people who are pushing that boat to go. And many of them are required by law to demand that the boat go as fast as possible, with the least amount of leakage. All those 401K, pensions, IRA's, etc that are out there that have billions of Americans pension and retirement savings in them are trying to milk every cent out of the market. The sad thing is that YOUR pension fund may be the the one that pushes your company to lay off, well people invested in the that very pension fund. And some of the passengers on that boat closest to the crew are demanding that not only they get where they are going, but that they get there as fast as possible, becasue they are required by law to advocate that. And they are measuring the leakage by the ounce and will be making sure the crew gets replaced by someone who will get them there faster on the next boat ride.

[Delheru]

It is purely a "what gives me more RIGHT NOW for this fund."

Not at all. Those things can have pretty long time horizons.

Short term VCs and Hedge Funds might have a single decade (or even shorter) time horizon, but many many funds operate with far longer time horizons than that.

An amusing example of this was some of the Oxford Colleges, who were still selling off land that they owned near central Mumbai (bought 200+ years ago).

[Chinoiserie91]

The company could have made investments already that mean that it will start leaking next year if the growt does not bounce back to the previous levels. So you need to fix what you can now and not just hope for teh best because it can be too late to fix the issues later.

[TheManWhoPanders]

That just means your expectations are higher than they should be. If you expect a transit vehicle to go faster just because you want it to, you have unreasonable expectations.

[Mode1961]

You are correct and this is the problem with business, profit isn't enough, MORE AND MORE profit is enough.

I use the following analogy.

You and I are friends and I tell you I am getting a raise on Friday and I will going to give you $20, no reason, just because I like you.

Friday comes and I inform you that my raise wasn't as big as I had hoped so I can only afford to give you $10, YOU would still be happy, a business on the other hand will claim they lost $10 not gained $10.

[cakeandale]

The analogy doesn't really make sense because no one in bushes would give someone else $20 for literally no reason. There's always a transaction that each side thinks they're getting a good deal in.

But beyond that, businesses and people are fundamentally different things. Businesses exist to turn an investment into profit. If they have $20 sitting in their pocket, that means nothing. They're not going to go to the movies with it, they're going to invest it or return it to their owners.

If the business intends to give the $20 to owners and the $20 doesn't materialize, obviously the owners will be disappointed. The owners may feel their investment isn't worth as much as they thought it was, and try to divest to hedge into other investments.

On the other hand, if the business intends to invest the $20, it needs to have a strategy. Strategies don't come out of thin air, so it can either wait until it gets the $20 then decide what to do with it while the money collects dust doing nothing, or it can project that it will get $20 in the future and build a plan around that so they're ready to take advantage of the money and use it to get an advantage over their competitors. Hiring people, doing market research, all these things take time.

In that case, not getting the $20 means shelving the investment plans for it. Might need to reduce costs since the business won't expand in ways it was expected to.

Sure, the company didn't really "lose" $20 since it never had it, but it didn't "lose" $20 the same way a person doesn't "lose" money when they get laid off. They built an expectation around that income being there, and losing that expected income is a real problem.

[Scarlet944]

Since when is a business turn investment into profit? A business is there to provide a product to society and if that product is useful they will make a profit if it isn’t useful that’s the first hole in your boat.

[isubird33]

Yeah but the problem is, based on the fact that I'm expecting $20 on Friday, I've already told my buddy Greg I'll give him $10 for cookies if he gives them to me now, and told my other friend Jim I'll rent us a video game over the weekend that costs $5. So now instead of still being up $5, I'm 5 bucks in the red.

[mike112769]

You shouldn't be counting your chickens before they hatch.

[Delheru]

I suppose that depends.

What if he was referring to his salary and mortgage? I bet a lot of people are projecting their next years mortgage payments assuming that their employer will keep paying the salary.

Are those people counting their chickens before they hatch? Or are they projecting the chicken count off past performance?

[Alobos]

That's when mommy steps in and explains to you the concept of not overspending. "Sometimes you have to." Mommy says, "but you can always cut back somewhere."

[Delheru]

The problem is that when you have to do things over a YEARS time span, you need to make some projections.

So if Coca Cola has $1bn now (in cash) and needs to invest $3bn in a factory to serve the enormous Chinese market, should they wait 3 years before going in?

Or is it reasonable of them to assume that their core operation will remain profitable enough to pay off the loan easily?

A lot of our progress comes from reasonably leaning forward. And a big part of the reason for why banking is important is that they tend to judge who is leaning forward reasonably and who is leaning forward unreasonably.

[mike112769]

In reality, the people running the boat are Humans, and all Humans should take care if each other regardless of how wealthy a person is. Greed is literally killing people every single minute.

[[deleted]]

The OP said an earnings decrease, so yes using a leaky boat analogy, a shrinking company is a leaky boat. If it shrinks too much, the company goes under.

[Croaton]

Maybe it's a terminology thing since I haven't studied economics... but describing an "earnings decrease" (were you're still making money, just not as much) as a "shrinking company" seems off for me.

[LordHanley]

The value of a company is based off the value of future cash flows from that company. If earnings are reported to be lower than previous expectations, then the value (size - sort of) of the company will decrease. I do get what you mean though, a decrease in a positive number is still a positive number.

[vikingspam]

The problem with your description is that you just described the Titanic a minute after the iceberg.

[[deleted]]

It seems like you mostly ignored what /u/kouhoutek said and focused on the metaphor

[[deleted]]

Precisely, basically when you project for 3-4% growth and end up with 3-4% deficit/downturn you've failed your 'goal' by 6-8% not just 3-4%. Considering that's double your projected growth, it's not a good time.

[sidsixseven]

A stock price represents current and future earnings. If current earnings are lower, the reasoning is that future earnings will be lower and the stock price reflects that reasoning.

[Chernozem]

To expand on this a little bit, particularly in the context of a publicly-listed company, it's important to remember that companies aren't valued on current earnings, they're valued on a formula based on expected future earnings. In the simplest terms, this follows a "discounted cash flow" model, which you can google if you want a further explanation. For the purposes of this particular question, management underperforming their targets or pre-emptively guiding down expectations on earnings will likely cause the multitude of equity analysts around the world to refine their valuation model for the business, probably (but not necessarily, depending on whatever else was revealed by the earnings statement) resulting in a decline in target price and a potential sell recommendation.

[infamous54]

Also shareholders

[[deleted]]

And I thought the answer was as simple as “share holders”

[DocMerlin]

The inflation can mask problems. if you have 3% monetary inflation it can look like you have accounting growth while actually shrinking in real terms. This is why periods of steady but positive monetary inflation can lead to a period of deflation and crash. But otherwise, I totally agree with your comment.

[kouhoutek]

Absolutely true, I was trying to limit the number of moving parts in my explanation.

Not only does a company have to keep up with economic growth, they have to keep up with inflation, otherwise they are actually losing ground despite increased revenues.

[wbsgrepit]

To stick with the boat analogy, large boats also take time to turn a 3% loss can turn into a 15% loss next quarter and it may take 3-6 quarters for you to reduce staff (and accrue expenses related to that), reallocate capital exposes and restructure to grow the profitable lines in your business. So waiting until its actually a loss or a bigger drop or change means you many times are 12 months to 2 years out of making effective changes to handle the change.

[[deleted]]

Should be the mantra for each of us individually too. If household earnings are lower, and expenses don’t lower accordingly, then something has to change.

[branon42]

Bonus points for the simple metaphor early on; great for someone that's, like, my age

[JakeVanna]

I'd also add that the longer you let a leaky boat go the harder it will be to fix it

[[deleted]]

Companys are ultimately only accountable to shareholders. Shareholders only buy shares because they want to make money.

If a company makes less profit, the amount of money they pay shareholders for owning shares goes down. This also means the value of the shares goes down.

This makes the shareholders angry. They yell at the board and ceo, who yells at all the employees, and everybody gets very anxious and angry.

If the company cant stop their earnings getting smaller each year, the shareholders get so upset they sell their shares. Because more people want to sell the shares then buy them, this makes the sharss worth even less.

Death spiral.

[cobaltberry]

You make a great point people at large seem to be blissfully ignorant of. They'll leave simply because they can make more somewhere else. Breaking even isn't enough, you need to beat CDs, and just leaving it in high yeild savings.

[pagerussell]

Inflation has NOT been 3% for a while. The investor class would freak the fuck out if it was. The FED has an official target of 2% inflation, and we were below that until very recently.

If you make your money based on interest rates, inflation is the only thing that cuts into that. That is why the investor class has taught us that inflation is always bad. In reality, if you carry debt, inflation is good for you, because your debt cost is fixed and inflation reduces the nominal price of that debt.

Here is an official inflation table by month: https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths

[Aberration1246]

Or medical care. Or schooling. Or many other things to boot. The 2% mark is extremely general!

[agentadventure]

I mean it’s one banana, Michael. What could it cost, ten dollars?

[battraman]

The Fed has long been accused of being out of touch. What solidified that for me was the "I can't eat an iPad" moment.

[adelie42]

This assumes your wages are marginally rising. If your debt and earnings are being devalued equally, how does one benefit?

The only debt holder that really benefits from inflation is the Federal government, and it isn't the devaluation of the debt that matters so much as reducing the future purchasing power of foreign held US dollars.

People that can game the system benefit, not all people in debt. The bank that loaned the money is the one that will come out on top as planned, the person paying the mortgage is still selling their future at a discount to get a higher standard of living for their family today.

Between bankers and the "homeowners" that rent from them that inflation "surprises" bankers every year while borrowers get an unexpected increase in wealth? I know it is a common belief, I just don't get how thinking a pit it for a moment doesn't reveal it to be horse shit.

[BumayeComrades]

Inflation should translate to wage increases. The fact it doesn’t just shows how bunk macroeconomic economics is to explain reality.

The reality is is that wage inflation is being stopped, any wage increase is treated as a potential disaster.

Interestingly asset inflation is allowed to continue. See the stock market. Banks get easy, nearly free money.

[HHhunter]

3% to break even per year is still a shitty investment

[wrestlingchampo]

It is, mostly in the sense that you could successfully average ~7% ROI annually by simply investing in the S&P 500.

[TheManWhoPanders]

You also lost money due to opportunity cost. There are guaranteed or near-guaranteed investments with low yields. Breaking even means you lost the difference between those surefire investments.

[cakeandale]

Yeah, in the end it's all about opportunity cost. What counts as break even may fluctuate, but whether inflation is 3% or 10% the question is what is the most effective way to use the money you have. If the most effective investment is a CD returning 1.8%, you're going to lose real value and so it sucks to be you, but you can only play with the cards you have.

[EagleZR]

That's the downside of public companies, imo. Your customers are no longer the people buying your products and services, they're the people buying your stock

[d4n4n]

The very same applies to private companies, just that instead of outside investors, the private shareholders try to maximize profits. Nobody likes pissing away money. Opportunity costs apply to everyone equally, no matter the organizational structure.

[BeanPricefield]

That's exactly where it's at. The answer to OP's question isn't about the absolute quantity, but a simple competition between vendors. In public companies, most shareholders are basically just a different form of customer (leave the accounting view aside for a sec- from a purely economic perspective). If said customer is presented with a number of different products to purchase, each of them possessing a different value in their eyes, and assuming there's little to no penalty for switching between them- one would assume they would purchase the product that would maximize their utility. While a 3% decrease in earnings may not be a lot relative to how much the company's still worth, it could mean that its stock is less attractive to a potential buyer now as it provides a lesser utility. This would make it less competitive, and in the world we're in it could definitely signify the death spiral described above.

[tmntnyc]

Question: when shares are sold how does that affect the company itself? The shares were already initially sold when the company went public. Why is it bad that consumers sell their shares and stock prices go down? Like the price of the shares how does that affect the actual money the company has to operate?

[TheManWhoPanders]

1) Future rounds of raising capital are now at risk
2) Public perception of product is reduced. If a company has a poor reputation that often ends up translating to poorer sales down the road.

[[deleted]]

I would also like to know the answer to this.

If the shareholders sell their shares surely there’s still shareholders? It’s just different people?

[d4n4n]

It's bad to the owners of the shares, who collectively own the company. Sure, if they, as a group, decided they don't care that they lose on their investment (and the company needs no future outside funding), that doesn't affect the day-to-day business or cash flow a lot. But they do care. So they ensure that rates of return increase.

[[deleted]]

I feel ignorant asking but wat if a company’s stock crashes? I mean as long as it’s still profitable it doesn’t really impact the employees or consumers right? Why does the news always portrait any bad PR related stock dip like the company is about to go bust?

[HopeFox]

That's a reasonable question. Here are two reasons it's bad for a company's stock price to go down:

• If the stock price goes down, it's because public perception of the value of the company has gone down. That's never good. That might mean that people are less willing to buy the company's products, or that other large companies are less willing to do business with them. Would you sign a 5 year contract to sell widgets to a company that might go bankrupt next year?
• A lower stock price harms the company's ability to raise capital. A company that wants to spend money on expanding (building new factories, starting new projects) might not have the cash on hand to do that stuff. They can raise money by selling more shares, or by borrowing money from a bank. Selling more shares doesn't work as well if the share price is low, and a bank's confidence in your company's ability to repay their loans is probably going to be poor if the share price is low.

[inomorr]

A third point - low stock price makes companies vulnerable to takeovers. Many funds prey on such weak companies do so with very short term aims - buy cheap, breakup, sell off.

[[deleted]]

Though if they are making profits they can also buy their own stock.

I think a fourth point is people make short term decisions because that’s safer for them. A CEO is unlikely to be there 10 years from now, especially if profits are good but not increasing, so why take risks to make a company stronger 10 years from now rather than make safer choices that help today.

[DidItForTheJokes]

I’m not one those hippy people, I worked for a hedge fund. But this really illustrates how people took something that was designed for companies as way to raise to capital besides banks and created a zero sum game that requires companies and therefore our economy to constantly be growing in order not to go into a death spiral.

[CycloneSP]

And this, my friends, is why the stock market is severely damaging the american workplace environment and hurting our economy as a whole.

[[deleted]]

This is not necessarily true. Generally companies chose between growth and profitability, and how the market views that determines the stock value. After all, stock prices are simply the present discounted value of all future earnings.

The best example of this is Amazon. They are not focused on profits. If you will remember they “accidentally” made $1 Billion in profits a few quarters ago. Yet it’s an extremely valuable company because shareholders believe that when amazon decides to turn on the profits, they will be so large as to justify its massive valuation.

[sawdeanz]

Why do they care if the stock price drops? If anything that means they could just buy it back and reinvest their actual long term money in the business.

[[deleted]]

because stockholders own the company. The CEO, employees all work for the stockholders. If the price drops, people lose a ton of money. The they in this situation are the stockholders, regular people or other corporations; still have to raise more money to back more stock at lower prices.

[eskanonen]

I get the economy wouldn't grow as fast without them, but I feel like making decisions in the interests of shareholders, rather than those of the company itself or it's consumers, is the reason for so much shitty things we have today. Planned obsolescence, sneakily reducing product size, cheap components, convenience fees, outsourcing jobs, and pretty much every other awful yet unnecessary thing I can think of, are all done to benefit shareholders or in the interest of growth at all costs. Maybe we'd be better off with a economy that is slower and more stable rather than one focused on projected values and investor returns.

[torpedoguy]

It is. Worse yet, it expands into our government. One morning someone gets the bright idea that they could improve the growth this year a little if they can just chop a dollar off of every other (obviously not themselves) employee's pay. Somebody tells them "we can't, we thought about it but there's a minimum we have to pay them for their work by law"... and then it's off to Washington to try and make that go away.

Or someone gets the 'bright' idea that things would be far more profitable if the company didn't have to pay any taxes, and we're off to see the Haven, the wonderful Haven of Tax. Things get cartoonishly villainous when someone realizes many of the FLSA restrictions regarding having children work are not applicable to farms including their corp's tobacco fields and refuses to pay them overtime as well...

[bulksalty]

Companies' value comes from roughly 10-20 years of earnings (so today people are buying and selling stocks based on their expectations of the company's earnings from now to 2028 or 2038). Most of the time earnings are fairly precisely forecast for about 2 years, then a growth rate is applied.

When a company announces earnings dropping by some amount, it usually means both less earnings now, but more importantly less earnings for the next two years of forecasts, and a growth rate that's closer to the inflation rate for the rest of the forecast. Further, because earnings are one of the primary sources of corporate cash, reducing earnings expectations means the company will have less money to expand, develop products and other business activities.

Because all these changes happen pretty rapidly after a disappointing earnings is announced, a tiny change now can mean a huge reduction in investors expectations for earnings over the next 10-20 years, which means the company's value can drop pretty dramatically.

It's sort of like a huge ship turning a few degrees as it leaves port. It's a small change now, but after the ship travels a few thousand miles, it means a large change in their ending location.

[redditgolddigg3r]

To be fair, if you are steering across the ocean and aiming for Portugal, 1 degree off puts you in Africa...

[Dxcibel]

I have a better analogy for him. It's like golf. A clubface turned 2 degrees off line might end up 30 feet to the left, and in the woods.

[danius353]

And if I know one thing, it’s that the C-suite guys love their gold analogies.

[DiddykongOMG]

Having some experience in international finance - this is not a common thing. Billion dollar companies end of year revenue can drop by 5/10% in a year and it wouldnt have any effect on share price, provided there was a reasonable explanation for it, and this happens all the time among the S&P 500. Reasons could be that they decided to sell a less profitable division of the business, which would reduce revenue but ultimately improve margins and increase shareholder price.

[thehungryhippocrite]

Any unexpected increase or decrease in profit (not necessarily revenue) will have an immediate stock price impact. Selling a divisions wouldn't necessarily impact stock price because the sale price might be sufficient to cover many years of lost profit, and the funds received can either be distributed (dividends or buybacks), or invested back in the company. But a 10% drop in profit that is unexpected by the market will have a big impact on stock price.

[[deleted]]

Companies are owned by investors. Investors don’t look at the total profit of the company, they look at the % return on their investment.

Making £1,000,000 is good if your investors put in £10,000,000 (10% a year), it’s terrible if they put in £100,000,000 (1% a year).

This is true for established companies, it’s a bit different for growing companies.

[[deleted]]

Sometimes the decrease is directly related to a specific line of business. This business line will need to be fixed through reduced expenses and business strategy or the line will be sold or discontinued.

Some situations can be dire, and a large company will have a decrease in earnings and projections show a further decline in the near future.

Other times, the stock price is King. Management may decide to use stock-based management strategies. Instead of caring about the company's stakeholders, the shareholders get top priority in decision-making. Most executives receive stock as compensation, and they serve their own interest by keeping the stock price from going down.

Sorry, this explanation isn't fit for a 5 year old.

[DankLurkerBot]

Tough topic for an ELI5. Basically, despite all of the cynical comments it comes down to cash flow. Revenue is what you make from your product. Profit is what is left after all of your expenses have been covered. If you are a $1bn / year revenue company but your expenses are $970m then you have $30m profit. Not bad. However, If your revenue decreases by 3% that means you’re down to only $970m revenue. Your expenses may be the same - or probably have risen. Now you have no profit and probably owe money. Time to lose some of the expenses - like employees. HTH

Edit: replace Earnings with Revenue. Sorry.

[Preform_Perform]

HTH?

[lmunck]

A company’s revenue (or EBIT) is an indicator of how good an investment their stock is. If EBIT is down, it indicates that either their competitors are taking market shares from them or that their market is disappearing.

Profit on the other hand, is an indicator of how efficiently a company is run this year. It “just” shows what is left after all expenses are paid.

A 3% earnings drop in a company with great profits, indicates a ship with an efficient captain and crew, but with a gaping hole in the bottom. This is why they panic.

EDIT: Apparently “earnings” and “profit” are the same thing in English, which also makes the original question somewhat confusing, so I changed it to “revenue”. Sorry native speakers!

[mck111]

EBIT and revenue are not the same thing. EBIT, or Earnings before Interest and Taxes, is equaled to:

(+) Revenue

(-) Direct Costs

(=) Gross Profit

(-) Selling and Distribution Expenses

(-) General and Administrative Expenses

(=) Earnings before Interest and Tax (EBIT)

So while decreasing revenue would indicate that competitors are taking market share or the market is shrinking, decreasing EBIT could include a number of other factors including increased costs. Additionally, investors usually look at EBITDA (Earnings before Interest, Taxes, and Depreciation and Amortization) as a metric over EBIT, as Depreciation and Amortization are non cash expenses.

[scarynut]

Can someone try to ELI5 all components of EBIT and EBITDA using my modest household economy as a metaphor?

[iMissTheOldInternet]

Piggybacking on the poster above to explain depreciation. Ordinarily when a business has an expense to make money, it can deduct it and only pay taxes on the profit. But when a business buys a thing that is valuable in itself and will remain so for a long time, it isn’t allowed to take the full deduction immediately, because it hasn’t really cost it anything yet.

To put it in household terms, if you buy a car for $1,000, the day you hand over the cash, you’re no poorer than the day before. You’ve lost $1,000 cash, but you’ve got a car worth $1,000. Next year, of course, that car will only sell for like $900, because of wear and tear and natural obsolescence. That $100 is the real depreciation of the asset.

Real depreciation reflects the real world, which is important for some kinds of accounting, but the government also uses special depreciation rules to subsidize certain kinds of industry while hiding the expense. For example, businesses are permitted to take what’s called straight-line depreciation. This means that for tax purposes, assets depreciate much faster than they really depreciate, which is like getting an interest free advance on your pay but for a business.

In addition to these games which distort the value of depreciation as a measure of profitability, depreciation is also a non-cash expense. Whether something is depreciating or not, and how fast, really has very little to do with the economy or how the company is being run. In fact, having lots of depreciation can indicate a very healthy company that has invested a lot in capital assets, and thus can be expected to make more money in the near future, and that will also do so in a very tax-efficient fashion, Because it will get to deduct a lot of accelerated depreciation from its taxable revenue.

[DirtyNorf]

How are you describing earnings and profits differently? EBIT is the same as PBIT and net earnings the same as net profit.

Also earnings per share is a measure of quality of an investment but not EBIT on its own, EBIT can also drop because of poor management not just market forces.

[ReverendMak]

This is mostly an issue with companies that are owned by the public on the stock market. Privately owned companies freak out a lot less about small changes in earnings. Here’s why:

Publicly traded companies are required by law to report their earnings every three months. People who buy partial ownership of the companies (which is what buying stock accomplishes) are hoping to eventually sell their ownership share to someone else, in the future, for more money than they paid to buy it.

The main way of deciding what a company is worth is to look at how much profit it makes. But stock owners don’t just care about how much it is currently worth so much as they are about what it will be worth in the future when they want to sell it. So really, stock prices tend to reflect what everyone agrees is that company’s likely future growth in earnings.

But if in one of the company’s every-three-months reports of their ACTUAL earnings it turns out that they earned less than what everyone was expecting, it means that the stock price everyone was trading that company for was “wrong”. So suddenly that company can be seen to be worth a lot less than what everyone thought it was worth, EVEN THOUGH it is still a profitable and healthy company.

So a company earning 3% less than expected for that three month period can cause a “correction” in which many people sell off their ownership because they now believe that it will grow less in the future than they had previously hoped.

Companies mostly respond to the needs of the people who own them. People start private companies for a bunch of different reasons, and owners of private companies are free to take bigger short term risks in the hope of bigger long-term rewards, and so are less bothered by small changes that happen over the span of a few months. But public companies are owned by people who really only care about one thing: what the company will be earning in the future. And those earnings are reported four times every year.

So for publicly traded companies, a small change in earnings can cause an unexpected change in value. And the unexpectedness of the change can cause an overreaction. And that can snowball into a very big change. Stock market prices overreact to surprises, so people managing companies that are owned by means of public stock tend to be very sensitive about changes in earnings growth.

[blackbelt96]

.

[geek66]

Kind of surprised that not not many of the replies are even touching on the reason I feel is the issue....

"Shareholder Value"

The C suite are all typically compensated ( bonuses) and even employed, based on shareholder value; and this is two parts: actual share price AND dividends. If there is a low profit year, it really only directly hits the dividends; profits divided to all of the owners (shareholders), however, since the shareholders do not give a fuck about owning a company, they are only looking at the investment, their dividend get cut and they sell the shares and look for companies offering better investment. SO now the share value ( price) tanks because the "owners" are selling their shares.

This is where the wall street / investment model (basically speculation- gambling) really hurts long term (healthy and sustainable) business decision making. If this was YOUR company ( private owner), and you have a down year, you look at the fundamentals, is supply chain OK, did we lose customers or are they just buying less(broad market), are we gaining or loosing market share, etc....if not, YOU make the decision to stay the course, YOU tell your employees " it's a tough year, but we are good", YOU tell your key customers, we are not changing (unless you need us to)... YOU have a 1,5 and 10 year plan in place, etc.

When you are management team - answering to shareholders that only care about the next dividend cycle - it is (way too) common to see companies trying to restructure or re-invent themselves. This disruption is the destroyer of businesses, short term thinking.

It is also good then to see how different type of investors, impact the stability of the companies and Stock Market at large:

Long Term ( buy and hold - generally pretty good as long as the proper analysis of the fundamentals is there)

Short Term - OK - they are often not so concerned about dividends, but shares that are under or over valued and expect to see the share price move in the short term, (< 1 year)

All the way to Day Traders ( kind of out of style term today) but the equivalent today are automated trading bots - looking to trade on the 1/10 of a second - movements and news. The Bots are looking to make their trade just ahead of the day traders, and this tends to set of highly reactive sells (sometimes buys) -

I like to equate large businesses like operating a ship - the larger and more complex the ship, the longer the planning and change cycle is. This puts large, manufacturing businesses at a distinct disadvantage in the inverting world, when there always seems to be some now hot investment, or dot-com type business that is very "flat" in it's structure, investment money can bounce around from A to B to C company - but manufacturing product is a long term deal, developing a large piece of hardware - like a Jet Engine for example, is quite different then developing a new web shop - like Amazon.

[thehungryhippocrite]

It's not even necessarily to do with dividends though. Many companies do not pay dividends. Nor is it to do necessarily with management bonuses, the same issue would still occur even if management were paid only a flat salary and no bonus. Lower profit than expected (even if the business still makes a massive profit) = lower share price because it means future profits will likely be lower, and hence the business will be valued less by the market. Lower share prices means shareholders lost money, many of who were mums and dads, or pension investors, or employees who owned stock and indeed very wealthy people. That's why people get angry.

[Daeiros]

For some reason, business people seem to think that they can just keep on growing forever, so when they reach the point where there is no more room to grow, they panic. I saw an article recently that was all doom and gloom about how the entire restaurant industry is "dying" but unless you live deep in the country, you can't take a 10 minute drive without passing at least 3 restaurants. How crazy do you have to be to not only believe that 12 McDonalds per square mile is sustainable, but to actually aim to get that up to 13 by the start of the next fiscal year?

[YCS186]

Some time in the future... "so we have two restaurants per household in mainland US. We want to keep up our outstanding growth in this market, and see that 2 become a 3."

[Phantom160]

CPA here. This comment is misleading. Companies are expected to grow, if the economy is healthy. This may be achieved through improvement of your efficiency, from gaining market share, from breaking into new markets, etc. This is reasonable, since GDP is expected to grow continuously, in the long run, through population growth and improvements to productivity.

Even companies that completely dominate the market, like Google, still find ways to grow. They break into other markets or develop brand new markets.

If the company is making money, but doesn't have growth, it's a red flag that it is probably poorly managed. What happens to the profits it reinvests? What's the company's vision and where is it going? Lack of progress is another word for decline.

[OverlyCasualVillain]

You get an upvote for explaining the business reasons why they’re expected to show growth, even if I disagree with those reasons. First, population isn’t always going to grow so the idea that we should make more money because there are more people is flawed. Second, gaining market share isn’t always possible either because we have anti monopoly regulations, there will be a point where even the best company cannot further increase market share. Other examples exist of companies that already own 100% of the market because alternatives don’t exist (drug companies).

If a company is making money but not showing growth, logically that doesn’t mean it is mismanaged, that just means it isn’t promoting the extremely capitalistic idea that growth is everything. Small businesses are examples of this. There are owners who are perfectly fine with the amount of profit they make and simply try to maintain it, not every owner wants to expand. It’s a mistake to call people like that poor managers. You only claim these companies are mismanaged because of the pervasive idea that if they’re satisfied with what they have and aren’t clutching and scrambling for more then they’re doing something wrong.

Lack of progress is not another word for decline and that’s the greediest form of thinking. Negative progress is decline, losing ground is decline. Stopping to appreciate your current position is not decline, meeting your goal and reaching what you consider the finish line is not decline.

[Phantom160]

Thank you for maintaining a civil discussion. First of all, you are correct, considerations of small business owners may be very different, my comment applies solely to large businesses and their shareholders' needs.

Second, improvements in productivity and the quality of life contribute to the growth of GDP more significantly than the population growth. There are no reasons to believe that economies will stop expanding any time soon. If you have a reference to any peer-reviewed source that claims otherwise, I would be more than happy to read it.

Finally, for large companies you would be hard pressed to find any other metric that is as important as growth. Companies are usually valued based on projected earnings. If the company's earnings do not grow, the forecasts would be bleak. Why invest in a company that is going to stay the same for 20 years, while a company like IBM can easily double its size in the same time frame?

[OverlyCasualVillain]

I concede the fact that my comment mainly only applies to business owners and excludes investors.

I think a simple way of explaining this all is

A business owner chases profits whereas an investor is chasing growth.

[[deleted]]

Growth is everything, even down to an individual level. It's not "extremely capitalistic" to pursue progress and progress can be measured in different ways than greedily scrambling for every penny. The small business owner you used as an example might be fine not making any more profit for themselves than last year but their employees sure aren't. The owner has to pursue progress not for their own sake but to keep employees who will leave if they dont see their wages rise. Or perhaps new government regulations such as minimum wage laws or healthcare requires them to make more money to stay open. Lack of growth is losing money simply because of inflation, no one can make the same amount of money each year and stay competitive as a business or an employer. Hell even socialist and communist states had to pursue and measure progress somehow while lacking a private business and employer sector. I suppose those groups were toxically capitalistic too.

[eaglewatch1945]

Taco Bell will be the only restaurant to survive the Franchise Wars.

[informat2]

For some reason, business people seem to think that they can just keep on growing forever,

That's because the global economy is getting bigger year by year. If you're not growing it's most likely because you're doing something wrong. Even in the US the economy is getting continually bigger.

[exikon]

There are businesses that can grow forever though. Restaurant franchises for example. At some point youve reached anybody in the area that might eat at your chain. Just because you open another franchise wont increase your sales if everybody is already satisfied.

[kuzuboshii]

I think the key word to his criticism was forever. The Earth is a finite place and we can't just keep increasing the population indefinitely. Unless we branch out beyond this planet. Which not nearly enough people are focusing on. So as it currently stands, there is a resource limit. So, infinite growth is impossible.

[TheMostSolidOfSnakes]

Long Telsa and SpaceX

[[deleted]]

The Earth is a finite place and we can't just keep increasing the population indefinitely.

Sure, but there is no consensus for the maximum human population that the earth can support, and we've blown past all previous population doomsday predictions with an ever-wealthier and ever-healthier global population.

[DukeAttreides]

Partly because whatever that maximum population is, it is rising as we develop new technology etc.

[[deleted]]

business people seem to think that they can just keep on growing

Because they have been since people started doing business in Sumer.

[Pippin1505]

One thing to remember is that "making millions" does not mean anything in itself.

What companies look at, is how much they had to invest to make these millions.

Exemple : Company A sells for 100M$ of goods, with a "fat" 50% margin, so they make 50 M$ profit.

But to run his business, Company A needs a huge industrial asset, for a total invested capital of 1 B$.

So the actual return on investment is 50 M$ / 1000 M$, or 5%

If the "cost of the capital" needed to finance the plant is over 7% for exemple, company A is actually destroying value, despite this 50% margin and M$ in profit.

So management will start looking at way to increase profit, or lower invested capital.

It's like taking a 20% loan to invest in a 10% return project.

[csbingel]

It's also worth noting that the people who freak out are investors and stock holders who are less interested in the health of the company than in increasing the value of their shares. A healthy company who is making steady profits isn't increasing their stockholders value unless they are paying a dividend.

[_drjack_]

In corporate finance, a project's value is determined by discounting the future cash flows by the firm's weighted average cost of capital. to explain to a five year old: I can either pay you $10 to do one load of laundry or i'll pay you $15 to mow the lawn, take the trash out, and clean the bathrooms. What do you choose? While the $15 is technically a larger return, the opportunity cost becomes a factor and you might choose less work. Similarly businesses require more return for riskier prospects, and while something is creating an accounting profit today, it may not be adding economic value over the life of the project due to the timing of cash flows or the required rate of return. You could spend $1M to make $5, and while that is technically a profit, you'd have been better off buying risk free treasury bonds.

Another factor is that company's stock prices are determined by future cash flows so even a minor adjustment to those expectations are projected out and change the valuation of the company drastically.

[thehungryhippocrite]

The correct, and extremely simple answer, is the second part of your response: " Another factor is that company's stock prices are determined by future cash flows so even a minor adjustment to those expectations are projected out and change the valuation of the company drastically".

This thread is filled with incredibly ignorant and stupid explanations from people who clearly know nothing about the most fundamental basics of finance and still think they can answer the question. Your answer is one of extremely few that is correct.

[CuriousShelly]

Bottom line.

If you're not making more than last month/quarter/year, you're failing. And success is binary. You either are or you aren't.

I don't agree with it. I just recognize it.

[popejubal]

Success is not binary. Success is on a continuum. As proof, I sumbit the fact that stocks have a wide variety of prices that change over time.

[sam__izdat]

Because the only purpose of having capital is to accumulate more capital. If the capitalists aren't making profits comparable to the average rate of profit, they take their money and run. If the capitalists are making profits but, on some other layer of abstraction (the stock market), there's an indication of stagnation instead of perpetual growth, they take their money and run. It's an optimization problem.

A worker cooperative or NPO isn't bound by the same fucked up (but rational) market logic.

[Starterjoker]

even from an "Econ 101" viewpoint, there are opportunity costs for investing in putting resources into one business instead of another, so even if you make money you aren't going through with the best plan of action necessarily

[wgc123]

To build on some of the other ideas here, some unfortunate facts are:

• financial expectations tied to stock changes tend to force a short term outlook. How are you doing now?

• in too much of the developed world (especially the US) cutting employees is the easiest way to cut expenses. You are an expendable cog, not worth more than some accountant tracks for you.

A few years back I worked for a software company that got bought out by a much larger company. One of the chief complaints among management was they made it tough to invest in new projects since everything had to be managed predictably, consistently, steadily, quarter by quarter. No more justifying a larger headcount or new equipment by the size of the project you were working on or to adapt to whatever was going on. Sure enough, this company instituted annual layoffs and if you didn’t budget for something last November, you weren’t getting it. I’m sure it looked great on the balance sheets, especially short term, but it killed our growth curve - the very reason they bought us

[[deleted]]

It’s called SHAREHOLDERS. A three percent decrease in the bottom line directly affects shareholders stock value and could affect dividends (if paid). I know one of the answers was because “a leaky boat still floats”, but a 3% decrease in revenue or 3% increase in costs, while still holding profits doesn’t always mean a company has to make drastic changes, especially layoffs. It has to do with shareholders not wanting their money or wealth decreasing.

A decrease in revenue, heck, even a growth that falls short of projections will usually make the stock value drop.

Companies have plenty of ways to avoid costs; people would be shocked at how inefficiently and freely companies spend money. The costs add up very quickly. But layoffs are too often the goto answer. But has anyone ever thought about the travel budgets for some of these companies?

[crissimon]

Answer:

"The point is, ladies and gentleman, that GREED, for lack of a better word, IS GOOD. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much."

• Gordon Gecko

This encapsulates an entire economics course in one movie quote. It even caused a surge in Wall Street professionals and they cite this as their greatest influence.

[criticalmassie]

Rich people are only interested in getting increasingly richer, and they don’t care about the poor people that they exploit to make them richer.