Profitability

Abstract

The preceding discussion has indicated that the status of companies may be important to their supply of funds. Companies with Stock Exchange quotations have ready access to a large and well-developed market for industrial capital. The ways in which non-quoted companies typically finance operations suggested that they may be at a disadvantage. But in practice most funds are generated within companies. Growth is thus likely to be more closely aligned to the opportunities for profitable investment than to technical considerations relating to the supply of external capital. Put bluntly, profits are the major source of funds, and thus companies are likely to relate their investment programmes to their current earnings. The quality of investment in the financial sense may therefore be a determinant of growth. If so, there should be some link between company growth and company profitability. The size and importance of any such link will be the concern of this chapter.