What is the relationship between profit margins and growth capacity?

Answer 1

Growth capacity is determined by investors who will spend money on your corporation. A trend of profits will help them feel better about buying your stock or loaning you money or giving you favorable credit terms so you can expand your business.

Profit is not the only way to grow. You can also borrow to get more cash for growth. Profit is not necessarily as important to growth capacity as cash flow. It is what you do with your excess cash that is key here. Major corporations will establish a portfolio of marketable securities to earn interest and dividends and withdraw that money to meet required obligations. You can also borrow to grow, or sell fixed assets at a gain.

But profit is important, however, because investors will want to see that you operate your business as a going concern and that you will stay solvent and not ditch your creditors or stockholders in a bankruptcy. But in terms of growth, cash flow is a little more important than profits.

Answer 2

Unless you have profit you have no way to grow. Lack of capital has probably been responsible for more business failures than any other single factor, other than mismanagement. Without profit you cannot borrow money because you don't have the means to repay the loan. Unless you have profit to put back into the business you cannot grow. For a business to grow and prosper it must make a profit. A company's profit determines whether a company can grow, become stagnant or fail.