The Danger of Bottom Line Profit Growth
The summer earnings season is off with a bang. Banks are reporting higher revenues and generally lower loan losses while manufacturers and retail outlets post growth on their bare bones staffing. Bottomline profits are great for a year, but after that, the year-over-year statistics aren’t so pretty.
Bottom Line Growth Doesn’t Last
Much of the increased profitability in major firms is coming not from revenue growth, nor expansion, but by shedding inefficiency, workers, and brands or divisions that just aren’t keeping up. In doing so, much of the growth that we’re seeing today is only temporary (budgets can only be cut once) and the growth lasts for just one year after it is no longer reported.
Don’t Get Fooled
Never ever complain about growth generated from a leaner company. When businesses can shed inefficiency, all power to them, its great. However, it is not in any way a long term strategy. Earnings growth that comes from bottom line cuts appears just one time, and then a year later the company has to again beat its profit growth generated from the bottom line. Well, they can’t shed any more costs, they need topline growth but in a consistent recession, there simply won’t be any top line growth. All we’ll have is just one year of inflated earnings, and after that, reality will strike again.
Don’t Play the Analyst Game
Getting caught up in the quarter to quarter earnings call is a guaranteed losing strategy. Analysts are keeping their hopes far too high when assessing growth one year out. Why you would ever expect top line growth following a quarter of pure bottomline cost cutting is beyond me. Don’t ever think next year’s numbers will beat this year, but that isn’t such a bad thing, either.
