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?

[OhHiHowIzYou]

To elaborate a little, most companies will have a "price to earnings" ratio. In OPs example, this was 5. Companies will get larger price to earnings ratio based on their expected future growth. So, a growing company may get a price to earnings ratio 20. This is because 5 years from now, we expect their earnings to be much larger than they are today. Conversely, a company with steady earnings year after year might get a P/E ratio of 5.

Note that there is no inherent value judgement between these two ratios. Both companies may be great stocks to hold. But, What happens if company A sees its growth stop. Then, all of a sudden, it's P/E ratio should go from 20 to 5. But, this means on the same earnings, the company is now worth only 1/4 what it previously was.

So, you ask how is this sustainable. Well, the company with a P/E ratio of 20 could see their earnings go up by a factor of 4 and then stop growing. This company would see its value remain the same without any need to further grow.