• This topic has 21 replies, 10 voices, and was last updated 7 years ago by g5604.
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  • Low Profit s
  • g5604
    Free Member

    Why do companies like Amazon report such low profits ? Is it just to avoid corporation tax?

    5thElefant
    Free Member

    Amazon constantly reinvest and innovate. So no profit.

    mefty
    Free Member

    A very interesting question. Typically, not making profits is self defeating because whilst you don’t pay any tax, you don’t make any money and no one is interested in investing in your company because they get no return. Amazon has managed to persuade investors that they will continually manage to invest to generate greater market share which will generate profits in the future. They have managed this for years – they have returned very small amounts to investors (through buybacks) but yet their value has continued to increase.

    Is the avoidance of tax a central part of the strategy or just a by-product? You probably need to talk candidly with the senior management to find out.

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    bainbrge
    Full Member

    Margins are crap as they compete on price for commodity goods. Costs aren’t trivial due to business model albeit no physical stores. The point is lasting long enough as the biggest player to create a de facto monopoly, then enjoy your spoils.

    Same strategy as all the other supposedly innovative internet unicorns – capture the customers through predatory pricing then exploit your monopoly.

    aracer
    Free Member

    Typically, not making profits is self defeating because whilst you don’t pay any tax, you don’t make any money and no one is interested in investing in your company because they get no return.

    That’s not entirely true. I’m generalising here rather than anything specific to Amazon, but if a company reinvests it should increase it’s value even if it’s not making profits and paying dividends, because the fundamental value in the company has increased. Hence people will happily invest and if you do you get a return through increasing share price. It’s not all about the dividends.

    g5604
    Free Member

    Margins might be tight but one year Amazon reported a loss on 5.6bn UK sales. That seems insane to me.

    Is profit only good for shareholders, not owners?

    garage-dweller
    Full Member

    Is profit only good for shareholders, not owners?

    Shareholders ARE the owners. In many cases that’s our pension funds.

    In VERY rough terms.

    As a shareholder you tend to want increasing share value and/or income depending on your personal motivations.

    Increasing share value from a shareholder perspective comes from changes in share price. You can buy and sell the shares. Share price reflects the market’s current view of the future prospects of the company.

    Income (dividends) from shares needs profit or more properly distributable reserves (Companies Act requirement), which are basically profit.

    wobbliscott
    Free Member

    Firstly no busin as has ever ever gone out of business due to poor profits. Companies only ever go bust because of cash. So profit is a fictitious number made up by accountants to justify their own self worth. BUT profit is important to shareholders who. Are really the most important people. so it’s all screwed up. That’s all. Who can square that circle?

    g5604
    Free Member

    Ok I think I am getting there, in the past profit was a good indication of a companies worth and a honest vehicle for collecting tax. Now some companies have convinced investors of their worth without showing much profit.

    Companies like Amazon still show small profit to help the share price, but minimise tax obligations through rerouting sales through tax havens.

    Sounds to me like corporation tax is unfit for purpose

    5thElefant
    Free Member

    Yes, we should get rid of corporation tax. It’s just a stealth tax on shareholders, employees and customers.

    geetee1972
    Free Member

    Very few people in business take much notice of ‘Profit”. Earnings before interest, tax, depreciation and amortisation otherwise known as EBITDA, along with free cash flow have been the preferred measures for analysis and valuation for about 20 years.

    teamhurtmore
    Free Member

    Profits are/have always been a made up figure
    EBITDA – grossly abused
    Cash flow – what matters

    Good that dividends are back in vogue, much better indication of genuine performance of a company.

    holmesy
    Free Member

    Hmmm, would say it’s somewhat more complex than just saying profits aren’t important and cash is all that matters, I would argue that whilst profitability is subjective and complex, and cash flow is undoubtedly critical, to understand a firm’s financial performance you really need to understand the income statement (ie profit/loss), cash flow and balance sheet.

    teamhurtmore
    Free Member

    I agree on the first point and the important of understanding the three main statements.

    But that doesn’t take away the point that “profit” is in essence whatever number management, finance and accountants want it to be.

    holmesy
    Free Member

    Yeah agree with that to a degree, it can certainly be ‘managed’!

    g5604
    Free Member

    So companies effectively have control over how much tax they pay?

    5thElefant
    Free Member

    So companies effectively have control over how much tax they pay?

    Companies don’t pay tax, people do. You do have control over what kind of tax gets paid, by who and when.

    g5604
    Free Member

    ^ of course companies should pay tax they benefit for public infrastructure

    teamhurtmore
    Free Member

    As 5th says, companies don’t “pay” tax

    g5604
    Free Member

    Right, I guess you mean they incur tax, but clearly they can control how much

    mefty
    Free Member

    As I said in my first post this is a very interesting question and there are lots of reasons for that. Some thoughts that have occurred to me as a result of reading the subsequent posts are:

    Profits, cashflow and the best way to measure a business
    If you had asked an auditor in the 1980s what a profit and loss account was, he would have said it was what dropped out when you subtracted the opening balance sheet from the closing balance sheet. Auditors pretty much only focussed on the closing balance sheet. As time passed and scandals happened (Polly Peck being an important one), Accountants started to worry more about profits and began to bring mark to market valuation to the balance sheets to ensure profits were reflected in the correct year. There is no doubt in my mind that auditors have tried to improve the reporting of profit.
    That said, management has a huge advantage in valuing stock, work in progress, or inventory, because it is often, not always, relatively easy to manipulate their valuation. And this is the problem with EBITDA, because such manipulation is reflected in the gross profit which is its starting point. (EBITDA is a crude tool which I believe was developed by LBO bankers as a measure of free cashflow which would be available to service debt. I first came across its use in the 1990s.)
    Cashflow is great and important, but if you only measure a business on this basis you would never make a long term investment and Amazon also is potentially a case where it is a poor measure. Therefore a mixed approach is the way to go.

    Dividends, providing a return to investors and the valuation
    There is lots of interesting stuff here. In no particular order a few points are:
    (1) Actuaries in the UK used to value share portfolios on a discounted cashflow of future dividends. They completely ignored the market value. This basis has been superseded by a market valuation basis which reduces the incentive to pay dividends.
    (2) In the US, there is a significant mismatch in the tax treatment of a share buyback and a dividend. The latter generally incurring the much higher tax cost. Warren Buffett, in his annual shareholders letters, will often refer to his preference for a company to return money by way of buyback for this reason.
    (3) In addition, to tax cost to shareholders directly, there will be often be an indirect cost as the company will need to repatriate earnings to the holding company which if held in an offshore structure will often incur a significant home country tax cost – see Apple and mergers for inversions.
    I could go on about the impact of leverage in a classical tax system, the merits of an imputation system, which we used to have, and the single biggest act of fiscal vandalism ever undertaken by a UK Chancellor, but I would be digressing.

    Do companies suppress profits to avoid tax and Amazon
    Public companies generally don’t because profits/earnings still are the headline figure upon which most managements are judged, drive the share price and more importantly are compensated through share options. However not all companies are valued on their profitability and Amazon is an example of one. There is a reasonable analysis here and the conclusion is.

    But while he (Bezos) certainly does seem to be having fun, he is also building a company, with all the cash he can get his hands on, to capture a larger and larger share of the future of commerce. When you buy Amazon stock (the main currency with which Amazon employees are paid, incidentally), you are buying a bet that he can convert a huge portion of all commerce to flow through the Amazon machine. The question to ask isn’t whether Amazon is some profitless ponzi scheme, but whether you believe Bezos can capture the future. That, and how long are you willing to wait?

    Aracer suggested that growing a company through investment should grow in value. This is very true, but whether that growth is better than investors would achieve if they had their hands on the money, in their not so humble opinion is no mean feat.

    g5604
    Free Member

    thank you for that detailed explanation. I find it fascinating that a company will actively look to drive profits down to 0.

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