Why must a company show continued growth year after year in order for it to be viewed favorably in the market?


I read all the time how a company’s stock price takes a hit because it didn’t grow as much as hoped or, even worse, its growth remained flat in a given quarter or year. But if a company has say $100M in revenue and $20M in profits (for example) and then does that year after year, why isn’t that viewed as fantastic? What’s wrong with having consistent revenue (and profits) year after year? Why does the market seem to demand growth? If I owned a company that had great sales and profits every year I imagine I’d be quite happy about it.

In: 11

Consistent revenue without making any changes is not a thing

Growth is how you sustain profits. People also just want more money.

Because time is money.

Company growing = Stock price goes up.

Company increase profits can pay dividends consistently and even increase the pay out.

Stagnant company = I rather be in on of the other two.

They don’t. Only “growth” companies must do this. Growth companies must show year after year growth because they aren’t paying any dividends now. They are foregoing paying investors dividends now in exchange for higher dividends later. If the company doesn’t show it is growing (so it can deliver those dividends later ) then investors will devalue it.

Many companies aren’t growth companies but they are generally in more stable industries. Energy, Utilities, Food, Vehicles, etc.

> …its growth remained flat in a given quarter or year….

> …$20M in profits (for example)…

Well, what happened to it then? Where did that $20 million go? Profits either go into growth or dividends, and not putting anything into growth has some bad implications.

It means they don’t think they can generate a better return on that money than their shareholders investing it elsewhere. It means they don’t have any new ideas, any prospects of capturing more market share and obtaining more customers. It means their only plans are status quo or doing worse.

If reinvesting in the growth of the company isn’t more promising than paying dividends and investing that money elsewhere, then why should investors keep their money tied up with the company as it is now? If not even “what we do now, just more” isn’t that attractive then how lucrative is what they are doing now?

Also it’s about return on investment for the investor. If the company you have invested in doesn’t grow, it means your asset doesn’t appreciate. So it’s just a bankaccount with risk.

There are better places to put your money.

If you’re an investor choosing between company A and B, company A had a profit of 20million which is awesome but cpany B had a profit of 30 million which is better. You’ll choose B, even if A is still great.

There’s more to it than just that: the risk/reliability of an investment is important. In one case A might not make as much profit, but it does so very consistently which is nice. Whereas B might make loads of profit one year then very little the next, which isn’t very reliable and you now consider it a risky investment.