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
They don’t need to go up every quarter, but investors want profits to increase every quarter.
The value of any company is directly proportional to its expected future earnings. If you purchased a share for 20x earnings and the earnings remain the same every year, you’ll reach breakeven in 20 years. A bit more than that, if you factor in inflation. If the profits increase a little every year you’ll reach breakeven a lot sooner.
Furthermore, investing in a business costs money. If your company reaches a profit of $1mn and you decide that you’re content with that and not attempt to increase the profit, you will have competitors that to try to increase their profit. They’ll market their business to attract new customers, change their offers to appeal to prospective customers, cut costs, etc. As their profits increase, so does their ability to invest in their business. And eventually, they may reach a breakthrough that enables them to provide a product or service that’s objectively much better than yours and you’ll go out of business.
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