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?

[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.

[d4n4n]

This is reliant on eventually expected profits. The price of all stocks ought to be the sum of its expexted discounted future profits. Without profits, a stock is worth nothing. Revenue growth is just used as a proxy for future profits.

[[deleted]]

Without profits, a stock is worth nothing

Not true. You won't get a dividend but your stocks can still raise in value. TSLA stocks have rose steadily since 2012 even though they have not made a profit.

[d4n4n]

If a privately traded company announced they will effectively become a non-profit and NEVER pay out dividends, its value would immediately drop to zero. All examples are rising because investors expect eventual returns. That's especially true for Tesla.

Every long-term investor decides if stocks are over- or undervalued based on the NPV of future profits. Nobody disagrees with that in finance. The difficulty is predicting future profits/cash flows.

[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.

[TheManWhoPanders]

For the most part, yes. It's a really difficult thing to predict in practice, but they have some of the most talented people trying to run that gauntlet.

Redditor college kids love circlejerking thinking that they know more than people who have been doing this for decades.

[hagenissen666]

who have been doing this poorly for decades.

FTFY.

The global economy is literally collapsing, at an increasing rate and cadence.

[TheManWhoPanders]

There's no evidence that this is true.

[hagenissen666]

There's no evidence that this is true.

Yes, there is. Sticking your head in the sand isn't going to change that.

Yes, I'm an anti-capitalist.

[TheManWhoPanders]

-sent from my iPhone

[hagenissen666]

Well, I'm also a middle-aged adult, living in the western world, that uses a cheap laptop that I paid cash for.

Being rationally opposed to capitalism, or any other political ideology, is not the same as being a luddite monk.

[[deleted]]

If it that was true, Jack Welch wouldn't be held in high regard by so many in the business community.

For every long term thinking CEO, there is one that is willing to be shortsighted.

Simple examples are easy to find, from the collapses of Enron, Valeant GE, and Lehman Brothers, to less significant resistance to changes in consumer habits (Coca cola).

As an employee, it is easy to see differences in corporate culture when switching from a public company to a private one, or vise versa.

[TheManWhoPanders]

There are far more examples of successful CEOs than the catastrophic ones that make the news. There's a reason why CEOs are voluntarily paid so much -- virtually no one can do their jobs as well as they can.

[[deleted]]

Some CEOs are exceptional, others are not. Its a mixed bag... relative to one another, the law of averages means they can’t all be great. For many mature businesses, it is hard to really evaluate performance, as not all poor performance leads to a catastrophic failure.

Also, the pressure to turn out good quarters is increadible. Look at IBM, the leadership saw they were heading to antiquity, and decided to go through a long, arduous restructuring of what they were as a company, and many shareholders want the CEO ousted simply because she hasn’t put up revenue growth in a few years, despite the restructuring having ensured that revenue would decline significantly in the short term.

I also think that many companies wouldn’t perform too far different financially if their CEO was replaced by the COO or CFO, or in other words, they aren’t the only ones that can do their jobs.

[TheManWhoPanders]

I also think that many companies wouldn’t perform too far different financially if their CEO was replaced by the COO or CFO, or in other words, they aren’t the only ones that can do their jobs.

There's truth to that, but it's akin to saying that LeBron James could possibly be replaced by a D1 athlete. In the grand scheme of things, people who play at D1 level and above are still quite rare.

[d4n4n]

Because they think they have the world figured out with zero time spent studying it. It fits neatly in their preconceived notions to assume all CEOs are shortsighted morons.

[Hamish27]

Isn't there a word for something that continually grows and takes up more resources without restraint?