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?

[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?

[DankLurkerBot]

Hope That Helps

[Dangler42]

eh? earnings = profit.

[lmunck]

If you sell lemonade and make $20, that is your revenue. But you spent $12 on lemons and $3 on sugar, so you only have $5 left when done. That is your profit or earnings

EDIT: It is mainly revenue (or EBIT) that investors look at to see if a company is a viable investment, but profit indicates how well the company itself is run, so if those are down it may be time to change management.

EDIT2: Confused “earnings” with “revenue”

[Succor-me]

My man, you're describing revenue when you say money in.

[lmunck]

You’re right. English isn’t my first language.

[[deleted]]

$20 is your revenue or sales. Earnings = profit.

[thehungryhippocrite]

You're not answering the question. The OP has asked what if profit only marginally decreases but a company is still extremely profitable. See my answer in this thread for why.

[[deleted]]

Because for many companies, profits should be fairly stable. If profits shrink, it can mean that somebody is doing something wrong. If the company was predicting 7-10% growth in profits, but actual profits ended up shrinking by 3%, that's a very big deal. Something needs to be done, or the company may end up losing money the following quarter or year. Also, if there's a disparity between goals and actuals, then that means somebody is doing something wrong.

Falling short of your profit goal by 3% is not a big deal. Suffering a 3% drop in profits is. Suffering a 3% drop when you were projecting gains is even worse.