Cut Staff to Increase Corporate Profits?

Few things can give a stock a quick boost faster than a layoff announcement — evidence that the best interests of investors and workers are often not aligned.

But while fewer workers may mean lower operating costs and higher profit margins, it’s also true that companies need to add employees if they want to boost or maintain their top line growth.

Well, not quite.  Its evidence the author does not know what he is talking about. Reducing headcount increases cash flow, which can be used for a variety of purposes. Increasing profits is just one purpose, but that is not the end, just a means. And that means is to increase the stock price which makes raising equity capital easier. Raising capital is a means to grow the company. That is the end being sought, and presumably that entails hiring more people.

Increasing cash flow can also signal a new strategy is being executed, again with the intent of growing the company, and as I wrote before, presumably entails hiring more people.

So the stock may pop and drift back down in the short-term, but short-term fluctuations could just be traders playing on an event.  The layoffs could also signal the beginning of executing the strategy to grow the company.


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