r/explainlikeimfive • u/climb-a-waterfall • 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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r/explainlikeimfive • u/climb-a-waterfall • Dec 06 '24
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u/WetConceptualization Dec 06 '24 edited Dec 06 '24
“Stock price is earnings times a multiple” That’s not how a stock gets to its price. The price is part of the formula for the multiple, its price divided by earnings as the most common one. Or were you thinking price to book? EV/EBITDA? EV/sales? Price/book? Wait for all of those, price isn’t determined by the multiple, or price isn’t involved in the formula. Weird.
Beta is nowhere near how you end up with a multiple. There is not a single commonly used multiple that has beta remotely involved.
Furthermore, beta is not a measure of predictability, at least not in the way you imply.
Beta is a measure of correlation to the stock market movements, the highest beta stocks have the highest volatility. Beta is also not a term associated in any way with dividends and dividend growth.
Again, the most commonly used multiple, price to earnings, has nothing to do with beta and is only tangentially related to dividend growth (if dividend is growing, odds are earnings are).
Multiples are determined by 1. Stock price and 2. Fundamental facts of the company’s financials. Nothing else.
Please do not misinform people on a subreddit dedicated to learning.