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Assume you are looking at a tech company and that it only makes money through advertising space, i.e. no tangible goods are sold.

If the company reported a loss at the previous quarter when the stock what at say $20/share, and now just before the company's next quarterly report, the stock trades around $10/share.

Won't this decrease in market capitalization have some effect upon earnings? The money that people put invest into the stock is used by the company to generate revenue. Less money to generate revenue is likely to mean less revenue. The company has lost half its value. Certainly this will have to have an effect on earnings?

  • You've got it the wrong way around! Revenue affects stock price, not stock price affects revenue!!! – Victor Jul 31 '17 at 23:31
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Most of stock trading occurs on what is called a secondary market. For example, Microsoft is traded on NASDAQ, which is a stock exchange. An analogy that can be made is that of selling a used car. When you sell a used car to a third person, the maker of your car is unaffected by this transaction and the same goes for stock trading.

Still within the same analogy, when the car is first sold, money goes directly to the maker (actually more complicated than that but good enough for our purposes). In the case of stock trading, this is called an Initial Public Offering (IPO) / Seasoned Public Offering (SPO), for most purposes.

What this means is that a drop of value on a secondary market does not directly affect earning potential.

Let me add some nuance to this. Say this drop from 20$ to 10$ is permanent and this company needs to finance itself through equity (stock) in the future. It is likely that it would not be able to obtain as much financing in this matter and would either 1) have to rely more on debt and raise its cost of capital or 2) obtain less financing overall. This could potentially affect earnings through less cash available from financing.

One last note: in any case, financing does not affect earnings except through cost of capital (i.e. interest paid) because it is neither revenue nor expense. Financing obtained from debt increases assets (cash) and liabilities (debt) and financing obtained from stock issuance increases assets (cash) and shareholder equity.

  • Thanks. I simplified too much, you're correct. I slightly edited to make a more inclusive statement. – ApplePie Jul 31 '17 at 17:35
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No. Revenue is the company's gross income. The stock price has no contribution to the company's income. The stock price may be affected when the company's income deviates from what it was expected to be.

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Look at the how the income statement is built. The stock price is nowhere on it. The net income is based on the revenue (money coming in) and expenses (money going out).

Most companies do not issue stock all that often. The price you see quoted is third parties selling the stock to each other.

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If the company reported a loss at the previous quarter when the stock what at say $20/share, and now just before the company's next quarterly report, the stock trades around $10/share.

There is a misunderstanding here, the company doesn't sell stock, they sell products (or services). Stock/share traded at equity market. Here is the illustration/chronology to give you better insight:

  1. Suppose there is a tech company selling ads (for the sake of illustration we called it XYZ company)
  2. The XYZ need capital, so, instead of borrowing money from bank, they issuing "shares" (shares = portions of company's ownership)
  3. Suppose XYZ issuing 1.000 shares and entirely offered to public at price $10/shares (via equity market)
  4. Then shares bought by public
  5. Now public have "XYZ's ownership" and XYZ obtained $10.000 ($10x1.000) as result of the transaction, (this $10.000 then serve as XYZ's capital)

Now addressing the question
What if the stock's price change? Let say, Its drop from $10 to $1
Is it affect XYZ revenue ?
No
why?
because XYZ selling ads not their stocks

the formula for revenue
revenue = products (in this case: ads) * quantity
the equation doesn't involve capital (stock's purchasing)

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It would be very unusual (and very erroneous) to have a company's stock be included in the Long Term Investments on the balance sheet. It would cause divergent feedback loops which would create unrepresentative financial documents and stock prices. That's how your question would be interpreted if true. This is not the case.

Stock prices are never mentioned on the financial documents. The stock price you hear being reported is information provided by parties who are not reporting as part of the company. The financial documents are provided by the company. They will be audited internally and externally to make sure that they can be presented to the market.

Stock prices are quoted and arbitrated by brokers at the stock exchange or equivalent service. They are negotiated and the latest sale tells you what it has sold for. What price this has been reported never works its way onto the financial document.

So what use are stock prices are for those within the company? The stock price is very useful for guessing how much money they can raise by issuing stock or buying back stock. Raising money is important for expansion of the company or to procure money for when avenues of debt are not optimal; buying back stock is important if major shareholders want more control of the company.

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