The Profit Cycle
Because the collective sales of all businesses form the GDP, they reflect the same rate of change as The Economic Cycle. However, not all industries are equally responsive to the economic cycle:
Responsive:
- Industrial raw materials and components
- it takes more raw materials (e.g. metals, plastic, energy) to expand the GDP
- Luxury items
- for example, vacations and trips
- Big ticket “durable” items
- for example, cars
Less responsive:
- Everyday necessities
- their consumption is less dependent on the status of the economy
- Low-demand commodities
- for example, clothing
- Everyday services
- for example, haircuts, transportation
Leverages also affect a company’s profits in response to the economic cycle. This include:
- Operating leverage
- the ability to scale up and down (increase sales) without increasing costs
- Financial leverage
- When the company’s capital is sourced via equity or debt and require interest payments, a decline in operating profit can cause the net income to decline more significantly.