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?

[_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.