Unprofitable companies can do stupid things

I recently started a thread of discussion regarding why I avoid companies that are unprofitable. The topic is fairly long so I am breaking it up into several posts. You can see the first posting here.

This is the biggest reason to avoid unprofitable companies.  There is nothing scarier than a desperate manager that is trying to squeeze success out of a broken system.  Managers in this situation almost always make short-term decisions that affect long-term results.

The easiest way for me to make this point is to point out situations where this happened.  In 2006, a very unprofitable General Motors [stckqut]GM[/stckqut] sold its financial arm, GMAC, to Cerberus.  At the time, GMAC was the most profitable part of GM, but the cash was used to shore up the money-losing automotive operations. GMAC later struggled due its sub-prime lending activities; however, this was definitely the case of throwing out the best parts of the company to save the worst parts.  The stock price of GM dropped immediately after the sale.

Also, unprofitable companies will tend to curb hiring, reduce headcount, or close facilities. While this could be a good thing by trimming dead weight, it invariably causes some amount of internal strife and, at the worst, can hurt long-term revenue.

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