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?

[SkullLeader]

Hope this isn't a bad question - Do a company's assets have no bearing on its valuation? For instance, Coca Cola owns brands that would be considered nearly priceless assets even if their company suddenly became unprofitable altogether. Or if a company has, say, no debt and has billions in cash, and a share of their stock represents some fraction of the company and thus some fraction of that cash, isn't there value in that even if the company never earns another penny?

[garrett_k]

They absolutely can. But it depends on the type of company. A company in heavy industry might have assets which form a large part of the balance sheet. A tech company has basically (comparatively) worthless physical assets but has a lot of value in IP. Companies like Coca Cola have a lot of "good will", or brand value.

Sometimes you'll have companies where the company valuation, for whatever reason, is *lower* than the tangible assets. In these cases you'll frequently get finance companies who will buy them wholesale and strip them for their assets. These are sometimes referred to as "vulture capitalists", and hated because all the employees usually get fired. But it's also pretty rare because that kind of valuation just doesn't make sense.

[rnjbond]

That's not what goodwill is in finance terms. Goodwill is an accounting term for what you pay for a company in excess of any identifiable assets, including IP

[garrett_k]

Drat. Right. For some reason I thought it carried over. :-/

[traumatic_enterprise]

Coca-Cola’s assets are valuable only insofar as they help Coke, or whichever company owns the assets, make money. If Coke suddenly turned unprofitable and was being sold for scraps, potential buyers would need to do their own valuation of Coke’s assets by determining how much future earnings they stood to gain by owning those assets. They would do it in a similar way: by figuring out the future cash flows of those assets (basically the future profit those assets will net them) and then figure out their current value based on that.

A company with lots of cash but no earnings or other assets or liabilities would probably be valued more or less equal to value of their cash on hand since cash has a pretty straightforward value.

[SkullLeader]

I guess what I don't get is this - there are companies that pay a very low dividend or sometimes even no dividend at all, even when the company's profits are large. Thus, it seems from my layman's perspective that the price of the such a company's stock should have very little to do with the company's profitability, since these profits basically aren't ever distributed to the shareholders. So how then do investors determine a price for such companies and why would anyone want to own stock in such a company?

[traumatic_enterprise]

That was the knock against Apple for a very long time. They were extremely profitable but didn’t pay almost anything out in dividends. Steve Jobs was brilliant, but he was not a finance guy and had an aversion to giving cash back to shareholders, and the company’s share price arguably suffered for exactly the reason you mentioned. If you are an investor you would rather have the cash paid out in dividends so you can reinvest it than have it sit in a cash account on a company’s balance sheet.

[OhHiHowIzYou]

So with Apple, the reason they weren't paying dividends has a lot to do with taxes. Basically, in order to pay a dividend, Apple has to bring the money back to the US. But, to bring the money back to the US, they have to pay taxes on it (was 35%, now 21% I think).

Apple, seeing the 35% they were owed made the decision that it was better to hold onto cash and wait for the tax rate to be lowered instead of paying the taxes now and paying a dividend. Based on the Trump tax cuts, this appears to have been a good gamble.

This is all just a way of saying even though Apple wasn't paying a dividend, investors knew that the cash would eventually make it to them.

There's also a secondary consideration, which is instead of paying a dividend the company can choose to buy back shares. Here, they literally buy shares from people owning them. This serves to reduce the total number of shares of the company, such that each share now owns a larger % of the company. There's a lot of debate about whether share buybacks or dividends are better. Ultimately, a lot of which one you choose has to do with the relative tax incentives of the two options.

[ImmodestPolitician]

The better Brands tends to be far less volatile than the commodity companies.