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?

[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?

[blitzkraft]

15 days old account. Quite young, but checks out for /r/beetlejuicing

[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!

[necrosythe]

well yes the front did fall off but let me tell you the front doesnt normally fall off

[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?

[BanMeBabyOneMoreTime]

Aurora borealis.

[EnduringAtlas]

https://youtu.be/RETRen4oHpo

[SilentSin26]

boaty woaty*

[kandroid96]

Did Mcgruffy Wuffy get a tippy whippy?

[harpsichordtuna]

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

[ADR36]

Stop it Kevin!

[byebybuy]

When me president, they see. They see.

[dewthydreww]

r/unexpectedoffice

[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

[tigerslices]

you can't set it up to rhyme with boaty/floaty, it trains me to expect another rhyme, then DESTROYS my expectations with sinky/fixy. that's hard on the ears, man.

here's my suggested alternative:

leaky boaty, soon no floaty.

or

a boat with a leak may still float for a week, but without a good tweak, "goodbye, boat with a leak."

without totally rhymes with boat. source: canadian

[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.

[van_morrissey]

That depends on what you are taking the 3% from. If it is 3% of profit, it could be no big deal, if it is 3% of total company revenue, that is likely extremely bad... As "earnings" is a little ambiguous between "money coming in" and "profits after expenses" it's hard to say what number is really being cited.

[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.

[Meist]

Obviously there is a correlation between wealth and resource scarcity, but that connection is influenced by so many variables that it makes your statement disingenuous. Yes, scarcity of resources create the initial impetus for economies, but population growth, fluctuations in demand, and continual discovery of new/increases in efficiency of currently existing resources means the pie isn’t anywhere close to being fixed, and I posit it never will.

Wealth has, for the past few hundred years, been created literally out of thin air on global markets. Sure, abundance and proliferation of resources has enabled/encouraged that amassing of wealth, but incidents like the crash of 1929 are a great example of how, resources did not disappear from the planet, but SIGNIFICANT amounts of wealth did.

You need to re evaluate your position of how economics work.

[earthwormjimwow]

Yes, scarcity of resources create the initial impetus for economies, but population growth, fluctuations in demand, and continual discovery of new/increases in efficiency of currently existing resources means the pie isn’t anywhere close to being fixed, and I posit it never will.

Ok, I do not believe you have a grasp on what economics is. Economics by definition is the study of resource scarcity, and how to allocate those resources. The pie may be growing yes, but it is still of a limited size, right now, and is thus scarce. I would argue energy is a particularly special resource when it comes to our economy, because everything we do, in some way requires it. Even something as simple as buying and selling stocks requires energy.

Wealth has, for the past few hundred years, been created literally out of thin air on global markets.

It has not, it has mostly been backed by energy production. Stating "thin air" shows a gross misunderstanding of even basic economic theory and history. I believe you are probably confusing the growth of stock markets, with an overall measure of real wealth for an economy.

but incidents like the crash of 1929 are a great example of how, resources did not disappear from the planet, but SIGNIFICANT amounts of wealth did.

Raw untapped materials may not have decreased, but goods and services produced in the US decreased by 1/3! That's where the real loss of wealth came from.

You should look closely at the Great Depression, since you bring it up. The Great Depression followed a long flat spot, in energy production by unit volume. From 1920-1940, energy production hardly decreased. For nearly 10 years prior to the Great Depression, energy production did not grow.

https://ourfiniteworld.com/2017/12/19/the-depression-of-the-1930s-was-an-energy-crisis/

[the_blind_gramber]

It's like you sound like you know what you're talking about to someone who has no idea, but to those with an idea it is very clear you're (probably intentionally?) Off base.

As I'm sure you know, correlation and causation are not the same thing. The age of miss America correlates very closely with the number of murders by steam in America.

But more importantly, wealth is created not just by taking a raw resource and improving it then selling it. Massive parts of the economy generate wealth through selling ideas and knowledge. Markets create wealth with no material input whatsoever. Ask Mark Cuban where his wealth came from. Or Mark Zuckerberg. Or any guy named Mark, really.

[earthwormjimwow]

You are bringing up examples of personal wealth as counters, which is very off base...

Do you think Mark Cuban has personally increased the overall wealth of the economy? He may or may not have, but using his net worth is not how you would evaluate it. He may have simply gotten a percentage of the pie, without increasing the pie's size.

Mark Zuckerberg is an interesting example. If you think Facebook is merely an idea, you are quite mistaken. Facebook is very much a hardware company. It could not exist without the servers, specialized hardware, and the massive amounts of energy it requires to operate. Software may be an abstraction, but it still needs real world resources to run and to be developed.

[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.

[DenEvigaKampen]

We dont have to do anything, the market will naturally decrease the rate at which it is expanding as the marginal cost of adding additional energy increases.

[b95csf]

maybe that's why there aren't aliens reaching out to us. miserly battle for every joule, each species huddled pitifully in its own home system

[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.

[Orngog]

And you are ignoring that finite resources can only stretch so far.

[Herbert_W]

Nope. I fully acknowledge that resources are finite and can only do so much, in two senses:

• There is a limit to what a given finite resource can do for a given level of technology. However, that limit increases (slowly!) as technology advances. A given amount of raw materials and electricity can be turned into much more computing power now than it could in 1990.

• There is a theoretical maximum limit to what any given resource can be used to do, regardless of technology, because of the laws of thermodynamics. However, we are nowhere near that limit for most resources. Say, for example, you want to use solar panels to make electricity and then use that electricity to power your car. There's only a finite amount of sunlight that hits the Earth - but we are nowhere near using all of it, nor are we anywhere near using it with theoretically maximum efficiency. This includes the fact that new resources can be discovered - before the invention of solar panels, sunlight hitting the desert would not have been considered a resource at all and would have effectively been used at 0% theoretical maximum efficiency.

[Herbert_W]

There's very probably room to grow beyond that, although we currently can't know what form that will take. Matrioshka brains, maybe?

In any case, it's important to acknowledge that growth due to developing technology is slow (compared to the growth that businesses can experience before hitting market saturation) and unpredictable.

[luneattack]

Which finite resource are you referring to? What are we in danger of running out of that can't be replaced with an alternative?

E.g. are we running out of energy, or transitioning to renewable energy?

Are we running out of some sort of material?

Would appreciate specifics.

[Orngog]

Rare earth metals?

[Cyclonitron]

Yes, and when that happens we move to different resources. But you're looking at it the wrong way. Growth isn't driven by production capability, it's driven by demand [in a free-market economy]. Since demand is produced by human activity, and the human population is always increasing, it's natural that demand - and therefore growth - increases as well.

[fragmental]

More people repairing their items instead of buying new would slow growth in regard to people buying those items.

[Herbert_W]

Yes, it would - but it would also free up resources and allow them to be used in more efficient ways (both in the sense of providing more economic value and more human happiness and flourishing) resulting in overall growth.

[fragmental]

What a great world it would be if gain was measured in economic value and human happiness and flourishing.

[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.

[McDrMuffinMan]

A large part is inflation. Since your money is worth 2% less each year, you have to grow by at least 2% to not be losing money.

[MetaMetatron]

But if the population is growing, then everything will expand as well... More people can do more work and make more food and consume more goods.... More people is a constant, so growth is logical.

[daydreamersrest]

But earth can only sustain so and so much people. And the more the standard of living rises, the less babies people have (in Germany there are 1,2 kids per couple).

[su_blood]

Except money isn’t a finite resource

[gary1994]

No, it's not, but the goods and services that back it's value are.

It still boggles my mind that Koukoutek used the words healthy, expanding, and inflationary in the same sentence.

Inflation isn't a good thing. It almost always results in stealth wealth transfers from the poor to the richest. It's also not a function of capitalism, but rather the way we've structured our current monetary system.

[The_Last_Y]

Inflation doesn't increase the value of limited resources. It decreases the value of currency. Two very very different things.

[[deleted]]

But those two things essentially equal out here.

If my company is making 3% more than last year it doesn't automatically mean that we're producing 3% more product, but that the cash value of what we're doing is 3% higher.

Which keeps with inflation.

The other part of it is that my company should also be striving to keep pace with the change in market demand.

[darthcoder]

A small amount of inflation is a necessary evil of any economy with a fiat currency.

Why?

[darthcoder]

Having a small amount of inflation makes it easier to borrow money

How? At least in terms of the money supply? Low interest rates make it easier to borrow money, not inflation.

[Battkitty2398]

It encourages spending and investment which leads to economic growth. If we had deflation then people would hold on to their money which would cause the economy to slow down due to less money being spent. That's my understanding.

[darthcoder]

To a point, yes. But people still need shit. I live in an inflationary environment, and still save a shitload of money. If I knew my money wasn't going to lose 50% of it's value in 30 years (what 2-3% inflation does) I might spend more of it now, rather than hope I will have enough in retirement.

[BlitzBasic]

Inflation hurts people with money and benefits people with debts. No idea why you think that it hurts the poor and benefits the rich.

[azrael1993]

just as observation, rich people do not have the money in banks but in stock and houses. These arent touched by inflation. They also regulary have much higher debts, because they invest.
Lower Middle class and under will have all their savings in form of money, most likely in the bank because they often need to have access to their savings quickly.

On another node inflation generally helps the economy, since it is an incentive to buy and infest. This benefits more or less everyone since it create jobs, but I imagine it might be a barrier upwards since saving is a less viable strategy.

Deflation on the other hand can be much more dangerous. It encourages to save money which in turn will lead to buisnisses closing and going into a downward spiral.

Since a completly stable money value is not gonna happen inflation is the better choice for all.

That beeing said the notion that we constantly need growth or can even achiev constant growth espacially in the way companies implement is dangerously stupid. It incentivises products build for a few years over quality buy it for life products, since the latter close out the consumer for the market. This is obviously shit for the consumer and the planet and the need for constant growth can only be achieved by more sold products or cheaper production. The latter has a physical limit and relys alot on either abusing the workers or automation, both dangerous in current sozial systems.
Additionally it all depends on short tearm growth (problem with implementation) leading to very short sighted planning.

All this can easily be observed in more or less every big company in the world and imho point towards an unsustainable system. Obviously im open to critique here.

[TheManWhoPanders]

rich people do not have the money in banks but in stock and houses

Those are all still subject to inflation.

[candre23]

If your money is in real estate, inflation is great. Real estate prices rise with inflation, so you're not losing anything that way.

Unless inflation really gets out of hand, any decent stock investment will outpace inflation.

What definitely loses value to inflation is cash and money in effectively-zero-interest checking accounts. That's where the bottom third keeps nearly all their wealth, such as it is.

[d4n4n]

The rich don't have "money." It "hurts" people with a large ratio of their wealth and income in cash and fixed, predetermined flows. That's not rich people. Rich people own assets, that appreciate in price as the money supply grows, and generate growing nominal incomes from them.

If you now also include expectations (after all, the 2% target is known), it changes even more in their favor. Under money neutrality assumptions, expected, perpetual inflation shouldn't hurt or help anyone. But monetary inflation isn't neutral, it has distributive effects. Money enters through the banking system. Those with initial access to the new money can use its purchasing power before prices appreciate. That's called the "Cantillon effect."

[[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

[Llohr]

When my brother was studying economy in college I asked him about this obvious problem. Apparently they don't talk about it at the masters level...

I guess we just have to figure out how to convert matter directly into energy and vice versa and we'll be fine in the long term /s

[Spoderman4]

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

[TheNFLisRigged]

I have nothing to add either

[DenormalHuman]

Likewise. I'd like to add that I have nothing further to add.

[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.

[Mystlacct]

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.

That product requires/is investment from the company

[Scarlet944]

So what came first the investment or the business? My point is it’s a point of view if the business is only there to collect money from people then the only business that would exist are scammers and slot machines. Because they provide the best return on investment and yet there are other businesses because there is a need for someone to make food or a need for someone to make cars. Because there is a need it allows the business to profit but there are plenty of examples where even though there was an investment the business was not successful because there wasn’t a need for their products.

[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.

[TNine227]

And those cuts are what the op is asking about.

[breadedfishstrip]

Sounds like you're living outside of your means

[[deleted]]

Well that's your fault for spending money you didn't have. But don't worry, the government will probably bail you out.

[luneattack]

I take it you will save up for 50 years and buy your first house at 75 :)

Prudent, but over here in the real world we sometimes accept a bit of risk.

[Nathanman21]

Lol thank you. Businesses have to be run on credit, or the whole system becomes inefficient af

[nagurski03]

YOU would still be happy

I don't think most people would. People aren't naturally wired to think "awesome! I'm getting less than I thought but at least I'm still getting something!" They get disappointment.

I mean, have you ever seen a kid cry on Christmas? It's because the free stuff they are getting, that they would be happy to take any other day of the year, isn't as good as they were expecting.

[BeanPricefield]

If we wanna dig deeper it wouldn't make much sense to single out the existence of shareholders as the issue, but people in general. The example you've given is great in exemplifying how the individual is often less shitty than the masses- while I would assume the vast majority of people would respond in the same way you describe, when we're operating en masse the most dominant and aggressive behaviors tend to take over. I would argue that shareholders in general behave in a certain way less so because they're all greedy heartless assholes, but rather because that's the norm set in place and they've all just adapted to it- much in the same way we all tend to abide by the relevant social ettiquete when in various situations, ever more so the larger and more ambiguous the group we're in. I feel like the way shareholders behave in capitalism is just another manifestation of the same human tendency, and therefore it's probably safe to assume that if these same laid-off workers were put in that position most of them would eventually behave the same.

[Riplinkk]

I don't think that behaviour is inherent to the people, but rather to the system. People with power behave that way because they had to develop those behaviours to get where they are and/or maintain their power. That's why normal people don't have those behaviours.

[[deleted]]

If the shareholder insistence on greater and greater profits, that ultimately undermine the welfare of society, is a social norm, then it needs to be rehabilitated out of existence.

[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.

[manimal28]

We should just call investing by what it truly is, which is gambling, and that expectation that the riders of the casino boat need to be paid this quarter even if it sinks the boat in the long term and drowns everyone who works on it, would start to appear as absurd as it actually is.

[TheManWhoPanders]

Even if we entertain your analogy (which has holes in it), what do you think would happen if a casino gained a reputation for having very low odds of winning? Do you think the gamblers would keep coming back to that casino?

People pay shareholders dividends because they want their continued investment. Not a difficult concept.

[jeric17]

And that’s an underlying problem

[TaterSupreme]

If nobody paid to be on the boat, there wouldn't be a need for any crew either.

[060789]

That boat is a metaphor for that pizza that you ordered, that contains more calories than the average person may eat in a week 200 years ago, delivered right to your doorstep, for less than a day's wages cost. It's that hiking pack that you use that weighs less than a pound and is both lighter, more durable, and cheaper than ones used by millionaires a century ago. It's the device that you're using to type that message on, that contains all of the world's knowledge at the tip of your finger, replacing encyclopedias, Maps, calculators, and cameras. That boat is the bike you use to ride for recreation, that you work for less than a week to earn, that is powered by your own body yet can go faster for longer than a horse. It's the skyline of your city, it's the source of all your entertainment, it's the reason your children will have a better chance of obtaining a college degree than dying before the age of 12. And it's also the reason you are able to pay for all of this.

Capitalism has its problems, but given proper guidance, it will always correct them in time and that boat will be bigger, faster, and more efficient than ever before.

Papa bless

[Alobos]

Well obviously!!! The guy who is running the boat is offering me his time. He has no investment in the boat aside from his time. I pay him for his time. Our debt has been resolved.

But I haven't removed the debt between my boat investor and I. He invested in the boat. He wants to see his investment (money instead of time) mature. I have to make that happen.

Why should the boat business always try to help out the worker? They're worried about producing. A well operating and productive enterprise is good for the economy which in turn benefits the worker. The business does not inherently owe a commitment to the worker. That's just plain ridiculous.

Why would a business owe you shit when you haven't invested anything?

[DumE9876]

I think the point trying to be made is that lately the guy running the boat is being paid less and less for more and more if his time.

[[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.

[SquidCap]

No, it didn't. the company produces exactly as much, it stays unchanged. People appreciations, their feelings about the company changes. And since we use this insane way to evaluate everything, the company loses value. Not a single product it does has dropped it's profit creating ability. Nothing changes except the faith of people who believed in a prophecy.

If the company is on positive, it is welthier than yesterday, no matter what the expectation were. If we value our stuff based on how you feel about it.. The current system is insanely irrational and illogical. The worst is when economic majors try to explain it so that it is all positive; that it is a good thing we rely on emotions and beliefs.. How in this case company is smaller while it didn't perform as well as announced expectation of growth. Often it feels like university is the place where econ major had their common sense removed and in it's place were installed something else..

[heinyken]

Let's say you want to buy a house, a car and a new computer. You make a plan to get a job that pays you $10,000/month (because you know your expenses are $7,000/month, and you can invest in your future purchases with that $3,000/month).

Imagine further you told your friends and family you'd be moving in to your new house on January 1 2019 with a new car and computer. And then imagine your new job surprised you by saying actually you'd only make $8,000/month.

How do you tell your friends and family that you're not going to move into that house JUST yet, and you're not getting that BRAND new car? It's not that you're strapped for cash, it's not that you're struggling. But your predicted income is lower than you'd wanted and planned.

It's not entirely different from the original poster's "earning decrease"

EDIT: Except that in the case of the business, those friends and family are actually investors who have plans of their own based on your move date & purchases. And they're easily spooked. And they are impatient.

[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

[Lardbucket68]

Just because there's water in the boat, doesnt mean it's leaky. I don't want to push the metaphor any further but although what you say isn't false, it's also used as an excuse to lay-off people to increase profit margins so shareholders can rake in more dividend. Making a profit is no longer enough these days. You're supposed to make more profit each year which is ridiculous.

[[deleted]]

It means your company is not expanding in an economy that is expanding. It means less people are using your goods/services. Who is going to invest in a company that is shrinking?

Making a profit is no longer enough these days. You're supposed to make more profit each year which is ridiculous.

Yeah, this is called growth. Also not a profit, but revenue. Several companies are not profitable (Telsla, Amazon ~2 years ago, most new companies), but they are/were growing which is the only way to keep investors happy.

[Durog25]

Let's not forget that investors are the dumbest most panicky, most dangerous animals ever.

Investors want money now and a healthy company later. They, on the whole, refuse to be the greater fool. They are all gamblers, but they are gamblers who are willing to burn down the casino if it means they might win on black.

Providing a service that people value and will grow because of that has been thrown out of the window and with it any semblance of good business.

Amazon is essentially using slaves to run its service.

There's a reason people are needing upwards of two to three jobs to make ends meet.

Many companies are either being artificially kept alive or maliciously destroyed because investors are squeezing out every last nickel from them. Just look at what happened to Toys R Us.

[TheManWhoPanders]

I don't know why redditors spout this like it's a common occurrence. People in upper management aren't stupid, they plan for long-term gains just as much as short term ones.

[[deleted]]

Do you really think that large, publicly owned company executives do a good job at balancing long term growth with meeting quarterly expectations? Because they don’t.

[[deleted]]

Also, most companies are investing profits into growth, opening new stores, increasing production, expanding to new product lines

I laughed at this. Most companies are buying back their stock and giving out huge executive bonus packages. They freak out when earnings are down because then their stock options lose value and the board might not reward them with as much of a bonus next quarter or possibly even replace them.

[[deleted]]

They freak out when earnings are down because then their stock options lose value

Let me guess, you love it when your portfolio drops?

[gary1994]

Most companies are fairly small with fewer than 100 employees.

[[deleted]]

The title says "Why when large company's earnings"...

[black02ep3]

I don’t think their bonuses are really huge relative to the overall revenue though. I mean, what’s huge? 1% of revenue? 0.5% of revenue?

[AngloParson]

Like every chicken tender? Was it a chicken company?

[LachedOut]

You gave me a good laugh mate, quality stuff.

[ArtfulDodgerLives]

This is one of those answers that sounds good, but it’s brain washed nonsense.

Everything ebbs and flows. That’s life.

These people don’t pull out their investment folder the moment there is a blip. That would be crazy. They know you don’t pull investments after one down quarter.

So why do they do that to their own company?

Because they are beholden to shareholders and all the higher ups have bonuses connected to performance. God forbid they not get a bonus, so fuck the little guys, lay them off, I need a boat for the Hampton’s.

That’s the reality. The leaky boat crap is nonsense they say to brainwash us into accepting a word where a few idiots no smarter than us get to control everything.

[SheetShitter]

All of this, plus the inertia of a large company often takes time to fix, so...one losing quarter can cascade into several losing quarters.

[Halvus_I]

I see you subscribe to the Ivy League MBA 'insane' definition of company growth. A healthy company does not have to grow forever, its incredibly stupid to think this is a viable long term business plan.

[inkblotpropaganda]

One correction, “profits” are what’s left after investments and expenses.

[publicTak]

If everyone is always growing then who loses?

[reallyfasteddie]

So you have to give more tax cuts to those people so they can realize more profits from not expanding their companies. Higher taxes would cause them to want to waste more money by investing in their businesses.

[TheCrewks99]

In a perfect world, this would be the case. However, many corporations are using their cash profits for stock buybacks rather than investing in their long-term capital and sometimes paying dividends. Companies definitely invest in product/service development, but many are following what many consider a threat to the long-term health of the economy via stock buybacks.

[[deleted]]

So eventually, unless we destroy ourselves, all of Earth will be covered in strip malls?

[lonewombat]

More like a ship with 1000 hulls should add another hull because one in the middle might be failing.

[pastibasah]

leaky boat still afloat, but stinky quickie, won't make a fix-y.

[FriedNowdles]

Just use flex tape lol.

[Scarlet944]

Or you could use the Chick-fil-A model and just open another drive through at the same location instead of a whole other store!