The puzzle of rising profits

Would you have guessed that a whole host of companies are reporting bumper profits, even as the economy struggles?

Apparently so. Despite all the concerns about the world economy, many corporations have still been recording large profits which, on the whole, have been much better than analysts had forecast.

According to the BBC, Apple made a record profit of £4.6bn in the three months to 25 June, 125% higher than a year earlier. Oil giants BP, Shell and Exxon Mobil have all seen higher earnings this year. Tesco made £3.54bn in the 2010-11 financial year (up 11.3%).

Even Toyota, although it has suffered from the impact of Japan’s earthquake and tsunami, has generally been seen as recovering faster than expected, and has raised its full-year profit forecast.

How is this possible?

According to the article’s quoted expert, the key is through being lean. “The main reason is during the financial crisis of 2008-09 companies moved quickly and aggressively to cut their costs and to keep things down to a minimum”.

Other ways of keeping down costs include, “the impact of modern software and computer systems to manage supply chains and so on is far better than it’s ever been ... companies have avoided very conspicuously any kind of inventory bulge (i.e. holding on to too much stock)”. Parts of the technology sector are also booming, where innovation has worked successfully. Giants such as Google, Microsoft and Apple are all continuing to report big revenues.

Oil firms have been benefiting from higher oil prices, a pick-up in demand has helped car and plane makers, while supermarket giants continue to see strong results, with Tesco, for instance, buoyed by growth in Asia.

What’s coming next?

Three months ago I mentioned that many companies, including those in the UK are building up a massive cash pile and it will be interesting to see when, or if, this will be recycled into a deluge of profitable investment (Apple, for instance, revealed in its latest financial results that it holds an enormous $76bn cash in reserve). But the confidence to invest remains weak.