What would happen if a companies profits just stayed the same over a period of quarters? I obviously don’t understand it at all but isn’t it just unsustainable to expect growth indefinitely?
In: Economics
A company’s board of directors is chosen by the people who own the company (the shareholders). People who own company stock want it to go up in value and (if applicable) pay out dividends (profits).
If you are a shareholder who wants shares to go up in value as much as possible and pay as high a dividend as possible, and the current management of the company is not doing that, the shareholders will appoint a CEO who will do that.
As far as infinite growth, it’s usually not seen like that. It’s just about what will happen THIS year (or THIS quarter). This is why video game companies who have just had record earnings will lay off a huge chunk of employees. Not because they need to save money due to a loss, but because it makes their earnings numbers look better today (even if it may slow growth next quarter).
Generally for shareholders. They’re buying into the company hoping their shares gain value. If the company always makes the same amount the share price won’t increase
It’s less of an issue with privately held companies, which is why there’s less pressure for those companies to increase profits every time
It is long-term unsustainable, yes, but shareholders don’t really care. In the short term it works, and people tend to like money now instead of possible money later
Why do you want a wage increase every year? Because of greed, because of inflation and because over time your skills are developing to be more useful, so you have every reason to expect more money.
It’s not so different for companies. Also, many companies at any given time are not doing so well at all, so improving results is required to get back to sustainable operation and to avoid bankruptcy.
Well you want to at least pace inflation or you’re actually losing profits. A company that has posted 0% profit growth over the last four years has suffered a significant decline relative to the value of the dollar because everything else costs 20% more.
Plenty of companies don’t target endless inflation-adjusted year-over-year growth though, you just don’t hear about them.
Family owned. Privately held. Utilities. Just remain consistently profitable and you can exist indefinitely.
But when a company sells stocks to investors with the promise of bigger profits and larger dividends later, now they’re expected to deliver on that promise.
The companies that chase endless growth do so specifically because they’ve made this part of their business and investment strategy and they’re now owned by a group of investors that expect this.
These are the companies that investors and financial news organizations care about.
Inflation exists which means employee salaries need to at least match inflation every year. Apart from that, performance hikes etc are all why profits need to keep increasing. To increase profits, you need more and more customers, and you need to hire more employees to manage the workload of more customers, and it’s a cycle that repeats.
If you’re not growing, you’re dying. If a company stagnates and isn’t increasing their business and growing with the times, someone else doing the same thing you are doing is. And they will be better able to serve the customer base, and likely for cheaper. And that will put you out of business.
Say you make a Widget. You get your business up to a level that you like and then just stop growing. Then someone else comes along and makes the same Widget. They continue to grow and expand, making more Widgets than you and for a cheaper cost to make them, meaning they can sell them for cheaper than you can. They will eventually take over the market because people will be paying them less for the Widget than what they would be paying you, so they buy from them instead.
If you have a unique product or service, you can get away with little to no growth. But as soon as you have any real competition for customers, you will more likely than not find that competition taking over the market completely because they spent their money on improving their service and lowering their costs.
There are millions of businesses – usually small ones owned by the same people that operate them – that are perfectly happy just pootling along, making a bit more profit one year, a bit less the next etc. The employees and suppliers get paid, the taxes get collected, dividend paid out and everyone’s happy.
There’s a fairly significant risk to simply being satisfied with this, though, because there are huge number of variables that go into how well a business does and not all of them are controlled by the business. So even this content, humble business owner is incentivised to feather their nest so that they can weather storms later on, to mix my metaphors. This isn’t what you’re talking about, of course, but I think it’s easy to think that the only businesses that exist are giant corporations when it’s not the case.
As for the actual thing you’re talking about, the issue is that…
> isn’t it just unsustainable to expect growth indefinitely
Most shareholders don’t expect growth indefinitely, they just expect growth *now*. This is almost tautological – would you buy shares in a company that you think is going to do poorly? Even if you’re happy with a business not growing, why *not* buy shares in a company that you think is going to grow? And if everyone that’s buying shares is doing that, then every shareholder thinks the company they have shares in should be growing. They might not think it will be in 5 or 10 or 50 years, they just think it will be for the duration that they own it.
Beyond just this, there are arguments to be made about gaining dominant market positions, being able to fund X, Y or Z, ensuring they don’t get gobbled up by the competition etc. But fundamentally it all comes back to the fact that all shareholders believed their company was capable of growing at the point they became shareholders, with only a handful of weird exceptions.
Basically a quarter is the probably smallest period for which meaningful data can be produced and investors and analysts are watching for signs that something is gone wrong with the business.
To attract investors, you need to prove that you can grow earnings. Companies are valued based on their future earning potential; if they expect to be more profitable in the future, they’re worth more today, not when the future profits are realized.
So in order to simply maintain value, you need to continue to grow (continue to prove future earnings increases), and to increase value you need to grow even more.
Profits don’t need to go up every quarter and most of the time they don’t.
This is a false question.
For tech companies *revenue* has to go up every quarter, because tech companies aim to work on large scale, but servicing more customers doesn’t mean increased profit if your selling your stuff at a loss (which most tech companies do at first, so they can reach a large size faster)
For non startups like large established companies, any form of consistent profit is welcome, it doesn’t have to go up all the time as long as the company as a whole is matching inflation.
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