mondblut said:
denizsi said:
Sometimes I can not believe the stupidity of big shot executives. So they are selling dumbed down AAA shit by millions. Well, they could also make a niche title or two and sell maybe upto a 100K more with minimum expenses. Money is money and as long as the profit should far outweigh the cost, but nooo, they are just too stupid.
You cannot into modern business. Profits don't matter shit, all that's important is capitalization. And a mere announcement of the next big AAA POS drives your stock price up better than a thousand of titles that actually turn up profit.
Not quite. That's a price bubble. Ultimately, shares are just mini-purchases of a company. It's not a lot different to buying and selling your way out of a partnership, except that you can't be chased after for the company's outstanding debt, and in return you pay company tax on top of whatever personal income you take out of it.
If you want a good example of what happens when share prices keep going up but profit doesn't materialise, take a look at the dot com bubble a decade back. Share prices don't actually keep the company afloat. If the company makes enough profit to pay its costs then it survices. If it doesn't, the company dissolves no matter the share price - which is why you had high-price companies dissolving each market bust.
Most of the time, the relevance of shares is simply to the company's shareholders. So yes, the company cares a lot about the shareprice, and profit CAN be secondary. But that's mainly because profit can be raised or lowered by the amount of reinvestment the company makes. The company can spend nothing, declare a great profit and pay it out as a dividend, but ultimately that's just returning the capital to the shareholders that they've already put into the company - you're just giving them their own money back. If you want that shareprice to be maintainable, you need a healthy balance sheet in the traditional sense. Any discrepency between share performance and balance sheet is temporary and usually due to inadequate information being available to the market - once it's clear that the healthy profit isn't going to materialise, the bubble bursts.
The only reason why the shareprice of the day is at all relevant to the workings of the company (as opposed to its shareholders) is because it goes towards determining the company's asset value. Which in turn affects how much the company can borrow, the likelihood of creditors foreclosing (if things are really dire), and, more practically, the interest rate at which the company can borrow. Given that all companies work off a hefty debt burden (if they didn't they'd be inadequately investing - called a 'lazy balance sheet' - and would be overtaken by competitors), those factors are actually quite important - especially the last one. Interest rates are essentially part of their ongoing business costs - it's the cost of obtaining money, where that money can then be used for developing products. If the company's share price drops, then they need to pay higher interest for the same amount of debt, hence it's like having an increase in their costs.
But that just means that profit+investment AND share price need to be looked after.