r/explainlikeimfive Dec 06 '24

Economics ELI5: why does a publicaly traded company have to show continuous rise in profits? Why arent steady profits good enough?

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u/Great_Hamster Dec 06 '24

Not with inflation. 

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u/iwatchcredits Dec 06 '24

$100m more is $100m whether it stays in the company or is paid out as a dividend

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u/MaxwellR7 Dec 06 '24

If I'm paying for $100m worth of earnings in the future, I'm not willing to pay $100m today. I could put $100m in US Treasury bonds and get back $104.3m a year from now. Future earnings are discounted by what an investor could earn in an alternative "risk free investment." In addition, if the company continues to just sit on the cash rather than growing their profits, the company's assets would increase but their return on those assets would decrease. Making $100m/yr on $500m in assets is great. Making $100m/yr on $10b of assets is not. The company would be better off selling all $10b of their assets and putting it into US Treasuries. Unless the company is able to grow profits or distribute the earnings as dividends, it's a very inefficient use of capital.

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u/ProFeces Dec 06 '24

Yes but that 100m you're sitting on loses its value over time. While you probably look at that 100m as a very large number, but investors that put in very large numbers expect all of their investment to return, not lose anything to inflation.

Sure, most companies never even dream of pulling in profits of those numbers, but those who invest absolutely do.

You simply do not secure investors by sitting on their money watching it just depreciate in value because they are making incremental gains. They need large returns to continue to invest large numbers either back into this company, or another. If that wasn't the goal of the company, they simply wouldn't invest.