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You're right in that most businesses need to grow to increase their value (generally because growth is built into their current valuation) but the narrative you

You're right in that most businesses need to grow to increase their value (generally because growth is built into their current valuation) but the narrative you're using isn't on target. 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.

phillmv 15y ago
Please correct me if I'm wrong! 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.
- ricree 15y ago
  >Sure. When I say growth, I mean "make more money this year than you did the year before". 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.
  - rhizome 15y ago
    It's the fallacy of the excluded middle that convinces people that stability has no value.
- tomkarlo 15y ago
  It's this statement that is incorrect: "In real terms, this means you need to grow your business by at least 3% in order to give me that return." 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.
  - phillmv 15y ago
    Cool! Duly noted. I was using it as a catch all for "make more profit than the year previous".

phillmv 15y ago

Please correct me if I'm wrong! 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.

ricree 15y ago
>Sure. When I say growth, I mean "make more money this year than you did the year before". 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.
- rhizome 15y ago
  It's the fallacy of the excluded middle that convinces people that stability has no value.
tomkarlo 15y ago
It's this statement that is incorrect: "In real terms, this means you need to grow your business by at least 3% in order to give me that return." 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.
- phillmv 15y ago
  Cool! Duly noted. I was using it as a catch all for "make more profit than the year previous".