Are Conglomerates’ earnings and profits more stable?
Most investors and even those who whole life place their savings under the mattress are aware of the fact that General Electric, being a conglomerate with very diversified earnings and yet profitable throughout all the economic cycles.
But there are always exceptions to the norm, just because General Electric functions well in terms of earnings and profits as a conglomerate spanning across a wide industry does not mean that most multi-industries companies are also the case.
Image Credits: Jud McCranie
Sometimes history does repeat itself, just because most conglomerates do not do well in the past may mean that most conglomerates may not do well in future also. The causation may be fundamental in nature such as spreading the management resources too thin. Remember, in whatever industry, you seldom see one company monopolizing all the businesses, at least for most, while some may argue about Microsoft in operating system market. As a result, building up a solid foundation to ride through the particular industry up and down is important in doing well.
How to reach a fair judgment based on historical data whether earnings and profitability of a conglomerate or a more focused company is more stable?
A. Use at least 10 companies for each group (conglomerates and focus companies) to check
B. Study these three sets of figures
1. Net earnings
2. Income before extraordinary items
3. Extraordinary items
Use spreadsheet programs like Microsoft Excel to graphically see the changes in these numbers every year, their means and standard deviations, with standard deviation being a good measure of volatility in earnings.
What you find may surprise you, as in ironically, despite having stakes in businesses across multiple industries; most conglomerates do not necessarily have significantly more earnings’ stability than focus companies, at least in a statistical sense.
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Interesting and informative. But will you write about this one more?
Thank you so much for your aid.
Thank you,
very interesting article