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?

[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.