Any business yielding a marginal profit has potential to result in a huge loss when market contracts and any business that is yielding a considerable profit might still give marginal profit when market contracts.
All businesses tend to approach what I termed Natural Rate of Return (NRR) which is bounded around 10%.
“Any business investment vehicle higher that NRR will attract ravenous competition which will eventually force it down to NRR.”
Businesses, depending on the industry and management capabilities can pitch at the lower end of NRR around 0-3% or can pitch at the upper end 7-10%.
For businesses realizing a lower NRR when the market contracts and the forces of supply and demand mismatch, they are much more prone to recording huge losses and massive layoffs or possible closure of business (incase of SMEs). Whereas those running at the upper end of NRR, should expect a reduction in margin but might not necessarily record loss when market contracts.