I don't understand why companies need to grow when they already produce big or even obscene profits every year
this post was submitted on 29 Dec 2023
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Because it's driven by shareholders. Consistent profits is fine for the company itself to continue operating, but doesn't typically move the needle on stock prices. The amount that shareholders would get as dividend payouts for a consistently profitable company is completely trivial compared against what they get if the share price grows by 20%.
This is a big part of the reason why publicly traded companies are so growth obsessed, often to the detriment of the actual product/service they're providing, their customers, or their employees.
Their customers then, are the shareholders and not the people who buy their products or services. What happens if they lose the shareholders? If the company already is making enough money to support it self, what is the need for shareholders?
If the company is publicly traded and has shareholders, then it doesn't have enough money to support itself. When you're buying a share in the company, what you're effectively doing is giving such company a loan. And you expect your money back. Plus interest.
Let's imagine a very simplified example. Company X plans to produce goods valued at $1,000 and they need $990 to produce them (that uncludes all the operational costs like materials, wages, taxes, marketing, etc). They aim for 1% profit margin ($10) at the end of they year. The problem? X management only has $900 in cash. So how can they achieve their goal? One option would be to fire some people, produce less goods and earn less money. Another option would be to seek investment for $90.
Again, this is a very simplified example. So, they go public and create shares which they value at $90. You go and them. Everything looks great, right?
Now the year passes. Balance at the start was $900 + $90 = $990. Then they spend $990 on manufacturing and their balance became $990 - $990 = $0.
X had a great year, they sold everything, there were no issues, happy days! So, $0 + $1,000 = $1,000. But you ask for your loaned money back. So, $1,000 - $90 = $900. And they can't produce $1,000 worth of goods next year, because they lack your $90.
What X needs to do is to either increase their profit margin in some way to cover your loan or find a way not to give your money back to you. In short, they are either now permanent slaves to shareholders or they need HUGE profit margin, which is not always possible. And when you start factoring in taxes, inflation, reserve funds, etc, company liability just grows sky high.
The reality is that running a business is very hard. US has tens of millions of registered companies and corporations. But you only hear about a few rich outliers in the news. Because majority of them are barely surviving.
If they lose the shareholders? That only means shareholders are seeking their shares, they go to another shareholder or are getting bought back by the company... If everyone is selling then the share price is driven down (too much offer) and the company might end up getting delisted from major exchanges, it doesn't mean they don't make a good product or whatever, but if everyone is jumping ship then there usually is a reason for it...
The company makes profit from shareholders only when it's their own shares that they're selling or when new shares are being bought, so initial offering, subsequent offerings (increasing the total number of shares that exist, current shareholders might not appreciate it). Going back to being private after finding success (buying back all the shares on the market) is usually so expensive that it's not something the company will consider doing, especially at that means depending on private investments to raise capital instead of being able to simply sell shares owned by the company or emit more shares.
But following the line of thought, where growth is being seeked for the sake of investors, denying that growth, would make the prices fall making it cheaper to buy them back. If a company stops trying to grow after it has found success, established itself and makes a good or even extremely high profit, wouldn't it be best to just stop growing and let investors seek other companies that seek to grow?
Sure but investors have a say in how the company manages its finances so they won't vote in favor of crashing the share price so the company can buy them back for cheap!
In a better market investors would expect their profit from well established companies to come from dividends and the share price would be fairly stable so investors looking for high profits would sell shares from established companies with stable dividends to people who want safe investments and would move on to growing companies where they could potentially make profit from the share price increasing rapidly until the company reaches a point where it's stable...
That exists, plenty of huge companies that pay good dividends with share prices that are moving at snail pace (look at the share price of IBM vs Apple for the last 25 years or so), but these days that's not what investors want, they expect profit from the line going up and selling their shares 🤷
Even then, just like you expect a pay increase to follow inflation, people expect their profit from a company to go up with time, may it be from the price going up or from dividends increasing...
Companies do not generally go public and start offering shares just for the fun of it. They need that influx of money from the initial offering for one reason or another. A company's overall margin is also generally not very large, especially compared to its market cap, which is what would need to be bought back. Amazon's profit of ~10 billion is trivial in comparison to their market cap of 1.5 trillion. Even their total annual revenue is still only about a tenth of that. They'd need to shrink by at least an order of magnitude for a buyback to even be possible, let alone plausible.
TL;DR: It is extraordinarily rare for a publicly traded company to have the cash flow necessary to consider buying itself back.
Shareholders definitely add to the problem, but one of the inherent flaws in capitalism is that there is a natural growth imperative.
From a macroeconomic perspective governments and economies require growth to insure political stability for consumers and producers. There's also a need to recoup the amount of currency that banks take out of circulation.
From a microeconomic perspective the growth imperative is driven by the inherent mechanisms of competition and accumulation. Basically, the only way to stay in competition is to increase the investment into a company's future profits.
It's not enough. They don't have all of the money yet.
Even if they had all the money, the expectation is that they would have more than all the money next quarter. Publicly traded corporations are cancer.
There are many reasons.
For example, there's a legal reason - if the management of a public company doesn't do everything in its power to grow the business, such management is facing criminal charges.
There's a financial reason - if the profit margin is below inflation, then the company is losing money and will go bankrupt over time.
Tax structure is also a reason. The company is not allowed to hoard money, excessive income is heavily penalised by taxes. So the company is forced to reinvest and grow.
There are other reasons as well. Most of them exist to protect the population from financial crime of all sorts. One way or another.
But obscene profits don't mean shit, only profit margin does. If your profit is $1b, but your margin is just 1%, then your business is dying as it doesn't even cover inflation. You're losing money in real terms, even with a spare $1b in your bank account.
So the stock price goes up.
The amount is irrelevant, only the growth matter! It's an addiction probably. Or maybe a missing kpi...
Right?? How much bigger does Amazon think it needs to be? It's already all the way big!
... I don't disagree, but which company
It’s Wendy’s yo 💎🤙
Wendy's increased its net income by 70%, pays its CEO 532X more than its median worker & is spending $100 million on stock buybacks. Now it's blaming the rising price of a Frosty on inflation? No. The problem isn't the Wendy's worker who got a 50 cent raise. It's corporate greed.
https://twitter.com/sensanders/status/1504495754789990403
just gotta google “ceo 532x more pay” 😉
I see you already have an answer. Another ~relevant answer would be "most of them."
But, but, but the private market solves everything! (/s)
Ahh, the invisible hand of the market strikes again.... /s
It's so shocking to me that there is a significant portion of society that has agreed that this is either a fun game to play, just the way the game works, or that it is their right by via some arbitrary relationship to someone real or imaginary to control the board.
The worse part in my eyes is that most of us don't even like this game or don't like the way that they're playing it. We are just enjoying the sandbox and want to play with the sand together or alone. We wanna build castles and have tea parties and certainly didn't agree to move sand around according to someone else's designs in exchange for means to buy some sand. We don't even want to own sand, but if you don't pretend to own some, then the ones who are paying you so that you can buy sand will take all the sand away from you and then you're not allowed to play in the sandbox anymore. You then have to go hang out in the corner where the cats poop.
And by far, the worst part of all: not only did we not want to play this game, the ones telling us we have to play the game in order to stay in the sandbox — the only way they can have fun and know that they're winning the arbitrary game is to kick the coarse bits of sand in our eyes while showing and bragging about how much fine sand they own. They don't even kick the fine sand at us because we "wouldn't use it right."
Man, I didn't even ask to be in this sandbox... But since I'm here, I just really don't wanna have to hang out in the cat-poop corner.
I'm not gonna eat the rich but i sure would enjoy watching others do it.
Changes in net income don't necessarily mean more money around, it probably involves an increase in costs too. Net profit is what to focus on.
And a "50 cent" raise is per hour per employee per year so for 1000 employees every 50 cents is $1 million per year. Obviously still small compared to a $100 million buyback.
There's an argument to make here but this post specifically is not a particularly good example of it.