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I thought the most important characteristic of a successful business was that it was profitable. If growth is so important and defines success then eventually

• smacktoward 13y ago
  For privately held companies, sure. For public companies, growth is important, because people who buy a share of stock for $X do so because they think that share of stock will someday be worth an amount more than $X. And growth is seemingly a very clear indicator of such an outcome. So the markets put pressure on public companies to always be growing.
  • cortesoft 13y ago
    Not always; many people buy stocks so they can earn a dividend. Even if the stock sells for the exact same price that you bought it for, it could still be a success if it was paying a healthy dividend.
    • fennecfoxen 13y ago
      And share buybacks are another way to raise the stock price with no new growth.
      • adamlett 13y ago
        That's a misunderstanding. When a company spends money to buy back shares, it decreases its value by the amount of money it spends. Therefore even though the company is now owned by fewer people, the value of the company has shrunk sinilarly, and the share prices remain constant. That is if the shares were priced correctly to begin with. That is why stock buy-backs only make sense if the shares are priced too low.
        • fennecfoxen 13y ago
          No. The company decreases its current liquid assets, but a company's worth is not just assets, it's (liquid assets + value of ongoing profit). Assuming a fixed profit, a stock purchase would cause the profit-per-share to increase, so (assuming a fixed P/E ratio) the price of an individual share rises. Assuming the company buys the stock at a completely fair price, it's true that the company doesn't experience any change in value, but it has distributed money to shareholders - which just like distributing dividends except with less immediate tax implications. (That said, I do understand companies usually overpay for their own stock, so the move is not necessarily the best one for any given company or companies in general unless the stock is, in fact, undervalued. But it is still one way to deliver returns into the pockets of shareholders, anyway.)
          • adamlett 13y ago
            But the value of the company's future profits is already priced into the stock (provided the stock is priced correctly). Otherwise the value of the company would just be its book value. If a company buys back stock that is overpriced, it actually destroys shareholder value. If the stock is priced correctly the outcome will be neutral for the shareholders. Only in the case where the stock is cheap relative to its value, is value created for the shareholders.
          • roblev 13y ago
            If this theory of share buybacks were true, it would lead to some fairly simple arbitrage strategies to make free money. (Buy shares in company x, force a share buyback so shares rise in value, profit). In reality these corporate actions are value neutral if the current share price is at fair market value. The value of ongoing profit is reduced if a company has fewer liquid assets to invest.
• robzyb 13y ago
  > If growth is so important and defines success then eventually is will plateau due to limited resources and no longer be successful which is obviously not true. That is actually untrue. One theory says that a business should grow with GDP.
  • jrs235 13y ago
    There are limited resources so defining success on growth will eventually lead to a point of no more growth and no longer be successful by a growth definition. Comparing to GDP gets tricky. Is GDP growing due to actual output growth and wealth generation or due to inflation? I suppose we need to first agree on what were looking at defining what a successful business based on a non moving target or defining success based on comparing it to other businesses. Do I think a businesses revenue should grow with GDP? Yes. Does the profit margin need to? Not necessarily. To be more successful at investing you definitely want businesses that have higher ROIs. However, are we discussing successful investing or successful businesses? Edit: typos
    • robzyb 13y ago
      > There are limited resources so defining success on growth will eventually lead to a point of no more growth and no longer be successful by a growth definition. Growth depends on resources AND technology. Its quite possible to have growth without any change in resourcing. > Comparing to GDP gets tricky. Is GDP growing due to actual output growth and wealth generation or due to inflation? It doesn't make a difference. In this case we are definitely talking nominal growth. My bottom line would be that a business would generally(!) not be classed as successful if it is not growing. Of course there are other factors that might make a stationary business considered a success.
    • dredmorbius 13y ago
      Is GDP growing due to actual output growth and wealth generation or due to inflation? "True" GDP should be inflation-adjusted, hence you'll see real GDP growth in adjusted statistics. Measuring inflation is its own kettle of worms. The more relevant challenge IMO is that GDP is a highly flawed measure. NNP (net national product) corrects for some of this via accounting for externalities, but both are still cash flow measures, when what would be more appropriate as a net measure of wealth would be a capital growth account -- equivalent to a businesses balance sheet. Sadly, this is one area in which macroeconomics has been stubbornly and persistently lacking.