Eli5: How can large companies be worth (valued at) so much when they do not make any net profit?
In: 7
Low net profits are often because they choose to spend more than they take in, but at a certain point they can pull back that spending and make large profits. Basically, they’re foregoing profits today to invest in bigger profits tomorrow. Valuations are based on future expected profits.
Say you set up a lemonade stand using a pitcher you borrowed from your mom. You can only make 1/2 gal. of lemonade at a time before needing to go back inside and making more. After a few days of this, you decide to invest in a giant insulated igloo drink dispenser that’ll hold 5 gallons and keep it cold too boot! To date, you’ve made $20 and you borrow another $15 from your parents to buy this Igloo cooler. At this point, you have a net loss but your business is worth more with the -$15 debt and the Igloo cooler than it was when you had $20 profits yesterday, because you can make larger batches of lemonade and keep it cold better to boost future sales.
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