Growth obsession—the new corporate disease?
Although many companies’ growth rates are being hurt by the economic downturn, many are still making bigger profits than in previous years. Are their predictions of doom exaggeration or mere blindness?
Reading the fresh annual reports big companies are now publishing, it strikes me as odd that most of them are predicting such doom.
True, the end of 2008 began to show the first signs of a serious downturn in business and the whole economy. The problem, however, seems to be that the companies are somehow fixated on their growth rates rather than the actual income they are earning.
I find this strange, because they may actually be earning more than before.
Let’s look at a hypothetical company whose operating profit was 10 million dollars in 2007. In 2008, they made 13 million dollars, 30% more than the previous year. Now their prediction is that the operating profit will grow “only” 10%. That’s down 20 percentage points from last year – horrors! The result: panic, budget cuts, massive layoffs, closing down factories or production lines.
But what really happened? In 2007, they earned 10 million. In 2008, they earned 13 million. In 2009, they predict this measly 10-per cent growth, which in figures will be 14.3 million – more than in two years!
In their opinion, they were doing magnificently in 2007 and 2008, and kept their stakeholders happy with reasonable dividends. The question immediately presents itself where have they now suddenly started wasting money if the stakeholders can’t be kept happy with the best operating profit in two years? Let’s also remember the stakeholders were probably ecstatic about the great performance of the company even those two years ago.
Of course, it makes perfect sense for investors to require continuously more. That’s why they are in business. On the other hand, more is exactly what they are getting even this year, although not quite as much more as before.
So, are the companies blinded by the wrong figures? Or are they just exaggerating the gravity of the situation?
Please let me know your views. I’ll also be more than happy to have my logic poked full of holes, be my guest. Click on the comment button below.