It's entirely possible for a business to give investors good returns even if their business or market isn't growing. Profitability and cash returns from a business can grow as revenues decline if the company either increases operating efficiency, or reduces in investment in recognition of the declining opportunity. MBAs would call this a "cash cow" business - one that should be milked.
We dont tend to see this much in tech because growth is such a fundamental part of our valuations that no company is willing to admit it's in such a position. And you'd probably lose all your engineers over time. But when you look at say, Microsoft, and strip away their non-performing businesses, that's what it looks like: a company that has some assets that produce a lot of profits, but aren't really growing any more, yet if managed properly can continue to throw off gobs of cash for years to come.
But:
>Profitability and cash returns from a business can grow as revenues decline if the company either increases operating efficiency, or reduces in investment in recognition of the declining opportunity.
Sure. When I say growth, I mean "make more money this year than you did the year before". This doesn't directly translate into "make more widgets", of course – that's just the (in an ideal world) easiest and least complicated way of achieving that.
>yet if managed properly can continue to throw off gobs of cash for years to come.
Until! It dies ;0.
If I understand tomkarlo's point correctly, he's saying that you don't have to make more money year to year in order to have a viable business. Rather, you simply need to keep expenses low enough to manage a respectable profit for your investors. That profit need not necessarily grow year to year for investors to find it worth holding.
Of course, valuations will be made completely differently for such a company, but that doesn't mean they can't exist.
In almost any definition "growing a business" means increasing unit sales, or increasing revenues, or both.
Neither is necessary to provide acceptable returns to an investor - there are great investments around in businesses that have long since peaked in terms of unit volume and revenue. Much of the private equity world focuses on these kinds of investments.
Duly noted. I was using it as a catch all for "make more profit than the year previous".
Yes.
> In real terms, this means you need to grow your business by at least 3% in order to give me that return.
No.
Suppose you want 3%.
You give me $100 and I buy $100 worth of goods which I then sell for $106. I give you $3 (there's your 3%), keep $3. That leave me with $100 to buy goods to do it all again.
Note that this biz doesn't grow at all but it can throw off 3% as long as I can keep buying at $100 and selling at $106.
What about inflation you say? Multiply all the numbers after the initial $100 by your inflation factor the first year and use the updated numbers (and your inflation factor) each subsequent year.
Really, your sentiment is reminiscent of the dot-com refrain of 'get big or go home'. Those were the true champions of growth-as-profit (and it sure turned out well for them)
Actually you don't "need" anything. There are tons of examples of profitable companies that do one thing / product, or several things / products and do it for a century or more, with thousands of employees that do not look to expand on other markets. Even more so for companies with less employees.
"""If I invest 100 dollars in you, I want to receive a percentage back after a certain while. You need to be able to give me 103 dollars back the next year just to beat inflation, i.e. for this to not have been a complete waste of my time."""
Yeah, that's why the stock market promotes cancerous growth of companies.
>Yeah, that's why the stock market promotes cancerous growth of companies.
I have troubles with this sometimes. I lie awake at night and think about the little I know about finance and economics and I wonder - is this all a zero sum interaction? Abstractly, the earth is a closed system, right?
Of course, value and money are also abstractions and so aren't directly pegged to any physical constants, so maybe in real terms it doesn't matter either.
Anyhow, my understanding is that the narrative I used above works for stock markets and single shareholder companies.
I have a fixed amount of hours/year to invest in my company/enterprise. Let's suppose it's profitable and yields oh 250k in profit/direct wages to you, the single shareholder.
If your total amount of profit remains constant, you're losing money just via diminished purchasing power. Your employees will demand raises, which means you have to raise prices and/or squeeze more productivity out of your company, yadda yadda yadda. If you don't keep growing… you end up finding yourself in a position where you will begin to contract, and it's easier to go down than to go up.
No, the amount of value in the world is not fixed [eg, 1].
[1] http://www.paulgraham.com/wealth.html ("The Pie Fallacy")
I don't mean boning up on company reports (though the ability to read and understand them is a good life skill) but rather truly trying to understand what money is, what it means, why so many apparent paradoxes exist.
To wit; wealth is not a zero sum game. Hard numbers like valuations come about just from an agreement at a point in time, which are just the opinions of two people at a flash in history. Even the value of a dollar in your wallet is a massively volatile thing in terms of what you can purchase with it.
A good jumping off point is Niall Fergusons 'The History of Money' (book or video). Get through that and then decide which of the sub-themes you want to delve into further.
It's the clearest explanation of this I've heard in a long time. However it's a bit long and deep, if you want an essay length version of the argument, it is here:
http://www.realitysandwich.com/money_and_crisis_civilization
Well, clothing and accessory companies, restaurant chains, publishing houses, film studios, etc, even software houses (has EA made anything else than games --anything substantial to their bottom line, that is?).
But don't think brand names. Think of the tons of companies we don't necessarily know by name, but exist and serve their markets: construction companies, package delivery companies, etc.
Look at Apple. iPod -> iPhone -> iPad.
If I invest 100 dollars in you, I want to receive a percentage back after a certain while. You need to be able to give me 103 dollars back the next year just to beat inflation, i.e. for this to not have been a complete waste of my time.
In real terms, this means you need to grow your business by at least 3% in order to give me that return.
I'm not the right person to talk about this, as my knowledge is thin and my metaphors are poor, but even if you're the sole owner you start to lose money if you don't grow at a reliable rate.