Public listed companies play a crucial role in the economy by generating profits through various means. These companies have the unique advantage of raising capital from the public, which allows them to fund their operations and expand their business. 

This article explores the different strategies and best practises that public listed companies use to generate profits.

Key Takeaways

• Public companies can raise funds by selling shares in primary and secondary markets, enabling them to finance large projects.
• Initial Public Offerings (IPOs) are a common way for companies to go public, providing them with significant capital but also posing challenges.
• Shareholders benefit from owning shares through capital gains and dividends, making investments in public companies attractive.
• Financial transparency and regular reporting are essential for maintaining investor confidence and can impact stock prices positively.
• Strategic investments, mergers, and acquisitions help public companies grow, diversify, and enhance their market presence.

Raising Capital Through Public Markets

Public companies can raise funds in the primary and secondary markets by allowing the investing public to purchase shares of the company. The ability to raise large amounts of capital in public exchanges enables public companies to carry out capital-intensive activities. In return, the shareholders benefit from capital gains of stocks, as well as from dividend payments.

Primary Market Fundraising

One of the advantages that public companies enjoy is the ability to raise funds through the sale of the company’s stock to the public. Before becoming public, it is difficult to obtain large amounts of capital, other than through borrowing, to finance operations and new product offerings. A private entity can only get financing by reinvesting its profits, taking out a loan, or getting investments from a few wealthy individuals, who may not provide adequate capital to meet the company’s financial needs.

Secondary Market Transactions

The stock market is one of the most important ways for companies to raise money, along with debt markets which are generally more imposing but do not trade publicly. This allows businesses to be publicly traded, and raise additional financial capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange affords the investors.

Impact on Capital Structure

Meanwhile, the public market opens up a huge opportunity for millions of investors to buy shares in the company and contribute capital to a company’s shareholders' equity. The public consists of any individual or institutional investor who is interested in investing in the company.

Role of Initial Public Offerings (IPOs)

An initial public offering (IPO) is the first time a private company offers its shares to the public. This process involves several steps, including hiring investment banks to market the shares, setting the IPO price, and determining the date. Companies must meet specific requirements set by exchanges and regulatory bodies to proceed with an IPO. Once the shares are available, they are traded on a stock exchange.

Benefits of an IPO

IPOs provide companies with a significant opportunity to raise capital. This influx of funds can be used for growth and expansion. Additionally, the increased transparency and credibility that come with being a publicly listed company can help in securing better terms for borrowed funds. An IPO also provides liquidity to company founders and early investors, allowing them to realise gains from their investments.

Challenges and Risks

While IPOs offer many benefits, they also come with challenges and risks. The process is costly and time-consuming, requiring extensive preparation and compliance with regulatory requirements. Companies may face market volatility, which can affect the IPO price and overall success. Furthermore, once public, companies are subject to ongoing scrutiny and must maintain high levels of financial transparency.

An IPO can often provide a powerful stimulus to private companies seeking to pursue an acquisition-driven growth strategy.

Shareholder Value & Dividends

Public listed companies generate profits not only through their operations but also by enhancing shareholder value. This value is often realised through capital gains and dividend payments, which are crucial for maintaining investor interest and confidence.

Capital Gains

Capital gains occur when shareholders sell their shares at a higher price than they purchased. Shareholders earn returns when they receive dividends or if they sell their shares when the price of the shares gain in value. This increase in share price reflects the company's growth and profitability, making it an attractive investment.

Dividend Payments

A dividend is a distribution of earnings, often quarterly, by a company to its shareholders in the form of cash or stock reinvestment. Dividends can provide a stable income and raise morale among shareholders, but they are not guaranteed. Companies that pay little or no cash dividends can potentially benefit shareholders when they sell their shareholding or when the company is wound down and all assets are liquidated and distributed amongst shareholders.

Shareholder Expectations

Shareholders expect companies to generate profits and provide returns on their investments. This can be through capital gains or regular dividend payments. Meeting these expectations is crucial for maintaining investor confidence and ensuring the company's long-term success.

Companies that consistently meet or exceed shareholder expectations tend to perform better in the long run, as they build trust and loyalty among their investors.

Financial Transparency and Reporting

Public companies must follow strict rules set by government bodies. They need to file reports with the SEC regularly. These rules include sharing financial statements and an annual report. This form gives a full summary of the company's financial health. These rules help prevent fraud and keep companies honest.

Investor Confidence

When companies share their financial information, it helps investors feel more secure. They can see how the company is doing and make better choices about their investments. This is important for both current shareholders and people thinking about investing.

Impact on Stock Prices

Sharing financial information can also affect a company's stock price. If the reports are good, the stock price might go up. If the reports are bad, the stock price might go down. This is why it's important for companies to be open and honest about their finances.

Strategic Investments and Acquisitions

Mergers and Acquisitions

Mergers and acquisitions (M&A) refer to the consolidation of companies or their major assets through financial transactions between companies. These activities can help a company grow quickly, enter new markets, or gain new technologies. M&A can significantly alter a company's capital structure and market position.

Reinvestment of Profits

Reinvesting profits back into the business is a common strategy for public companies. This can include buying new equipment, expanding operations, or investing in research and development. Reinvestment helps in sustaining growth and improving operational efficiency.

Diversification Strategies

Diversification involves entering into new markets or industries to reduce risk. By spreading investments across different sectors, companies can protect themselves against market volatility. This strategy can also open up new revenue streams and opportunities for growth.

Strategic investments and acquisitions are crucial for a company's long-term success and stability. They enable companies to adapt to changing market conditions and stay competitive.

Operational Efficiency and Cost Management

Economies of Scale

Public companies often benefit from economies of scale, which means they can reduce costs by increasing production. When a company produces more, the cost per unit usually goes down. This is because fixed costs, like rent and salaries, are spread over more units. Effective cost management can fuel growth by allowing companies to reinvest savings into other areas.

Cost-Cutting Measures

Companies also look for ways to cut costs without hurting quality. This can include negotiating better deals with suppliers, automating tasks, or even reducing energy use. For example, the efficient management of selling, general, and administrative expenses (SGA) in technology companies is intricately tied to the cost of operations. These measures help companies stay competitive and improve their bottom line.

Technological Advancements

Technology plays a big role in making operations more efficient. New software and machines can help companies do tasks faster and with fewer mistakes. This not only saves time but also reduces costs. A holistic, outcome-based cost management approach that's part of an enterprise-wide transformation can change an organisation's business for the long term.

Market Expansion & Global Reach

Entering New Markets

Expanding into new markets is a key strategy for public listed companies aiming to grow their business. By entering foreign markets, companies can tap into new customer bases and increase their revenue streams. This often involves extensive market research to understand local consumer behaviour and preferences. Companies may also need to adapt their products or services to meet the specific needs of the new market.

International Partnerships

Forming international partnerships can be a valuable strategy for market expansion. These partnerships can provide companies with local expertise, resources, and networks that are crucial for successful market entry. Collaborating with local businesses can also help in navigating regulatory requirements and cultural differences. Strong partnerships can lead to mutual benefits and long-term success in the new market.

Export Strategies

Exporting products to international markets is another effective way for companies to expand their global reach. This strategy allows companies to sell their products in multiple countries without the need for a physical presence in each market. Companies must develop efficient logistics and distribution systems to ensure timely delivery of products. Additionally, understanding and complying with international trade regulations is essential for a successful export strategy.

Product Innovation and Development

Research and development (R&D) is the backbone of product innovation. Companies invest in R&D to create new products and improve existing ones. This process often involves experimenting with new ideas and technologies to stay ahead of the competition. Invention and innovation drive the economy by bringing fresh solutions to market.

Product Lifecycle Management

Product lifecycle management (PLM) is crucial for maintaining the relevance of a product. From the initial concept to the end of its life, each stage requires careful planning and execution. PLM helps companies manage the costs and resources associated with a product, ensuring it remains profitable throughout its lifecycle.

Customer Feedback Integration

Listening to customer feedback is essential for continuous improvement. Companies use this feedback to make necessary adjustments and enhancements to their products. This not only helps in meeting customer expectations but also in identifying new opportunities for innovation.

By integrating customer feedback, companies can ensure their products meet market demands and stay competitive.

Brand Strength and Marketing

Brand loyalty is crucial for public listed companies. A strong brand encourages repeat purchases and fosters customer trust. This loyalty can lead to a higher profit margin as customers are more likely to choose a familiar brand over competitors.

Effective advertising campaigns are essential for building brand strength. Companies use various media channels to reach their target audience, including TV, radio, and online platforms. These campaigns should be well-planned and engaging to capture the audience's attention and convey the brand's message effectively.

Public relations (PR) play a significant role in maintaining a company's image. PR activities include managing media relations, handling crises, and promoting positive stories about the company. Good PR can enhance a company's reputation and build trust with the public.

Corporate Governance and Ethical Practises

Board of Directors

A company must answer to its shareholders when it's public. Shareholders elect a board of directors who oversee the company's operations on their behalf. Certain activities such as mergers and acquisitions and some corporate structure changes and amendments must be brought up for shareholder approval. This effectively means that shareholders can control many of the company's decisions.

Corporate Social Responsibility

Publicly traded companies adopt a variety of corporate governance policies in order to comply with U.S. federal securities laws and stock exchange rules. Sustainability principles are integrated with corporate governance to ensure a company's operations align with broader ethical and societal interests.

Ethical Business Practises

Ethical business practises are crucial for maintaining investor confidence and public trust. Companies must also file quarterly financial reports called Forms 10-Q and current reports on Form 8-K to report when certain events occur. These events include the election of new directors or the completion of an acquisition. 

These reporting requirements were established by the Sarbanes-Oxley Act, a set of reforms intended to prevent fraudulent reporting. Qualified shareholders are also entitled to specific documents and notifications about the corporation's business activities.

Risk Management and Mitigation

Financial Risks

Public companies face various financial risks that can impact their profitability. These include market risk, credit risk, and liquidity risk. Effective risk management involves identifying, analysing, and mitigating these uncertainties. Companies often use hedging strategies and insurance to protect against potential losses.

Operational Risks

Operational risks arise from internal processes, systems, and people. These risks can lead to financial loss, legal penalties, or damage to a company's reputation. To manage operational risks, companies implement robust internal controls, regular audits, and employee training programmes.

Compliance Risks

Compliance risks are associated with the need to adhere to laws, regulations, and standards. Non-compliance can result in hefty fines and legal actions. Companies must stay updated with regulatory changes and ensure that their practises align with legal requirements. This often involves regular compliance audits and risk assessments.

Conclusion

Publicly listed companies have several ways to generate profits, primarily through raising capital by selling shares and making their financial information available to attract investors. By going public, these companies can access a larger pool of funds, which helps them finance their operations and expand their business. Shareholders benefit from this arrangement through potential stock price increases and dividend payments. 

At PIF Capital, we fast-track investors, SMEs, and business owners with the power to earn higher profits through IPO (initial public offering). 

Jonathan Por; our Founder and Chairman of PIF Capital is a serial entrepreneur with 30 years of experience. Throughout the years at PIF Capital, we have built an exclusive capital community with over 40,000 SME community members, and share formulas created by PIF Capital such as the CPTK(Capital, Professional, Talent, Keymanship) model, 3F(Friend, Family, Fans) model, and the ABC(A+ entrepreneur, Business model, Capital) model.

Frequently Asked Questions

What is a public company?

A public company is a business that sells its shares to the public on the stock market. This means anyone can buy a part of the company and become a shareholder.

How do public companies raise money?

Public companies can get money by selling shares in the primary market during an IPO or later in the secondary market. This helps them fund big projects and grow their business.

What is an Initial Public Offering (IPO)?

An IPO is when a private company sells its shares to the public for the first time. This process helps the company raise a lot of money to expand its operations.

Why is financial transparency important for public companies?

Financial transparency helps build trust with investors. Public companies must share their financial reports so investors can make informed decisions.

What are dividends?

Dividends are payments made by a company to its shareholders from its profits. They are a way to reward shareholders for their investment.

How do mergers and acquisitions help public companies?

Mergers and acquisitions allow public companies to grow quickly by buying other businesses. This can help them enter new markets and increase their profits.

What role does innovation play in a public company's success?

Innovation is key for public companies to stay competitive. By developing new products and improving existing ones, they can attract more customers and increase sales.

Why is corporate governance important?

Corporate governance ensures that a company is run ethically and efficiently. Good governance practises help protect the interests of shareholders and maintain the company's reputation.