When the figures are sad. Negative profitability

Date:

2020-07-03 02:15:06

Views:

576

Rating:

1Like 0Dislike

Share:

Table of contents:

Despite the fact that no entrepreneur wants to operate at a loss, the business is highly unpredictable, and situation when the company for the period under review, not only increased capital, but even reduced it, are not uncommon. Negative profit, also called net loss, largely distorts all hope  management indicators. Indeed, when the main indicator is the profit, literally screaming about the need to change something in the side indicators do not make much sense.

Considering one of the main performance indicators of the enterprise – profitability, we can immediately note that in case of negative profits, this indicator is practically useless. By the way, there are still many people doubt whether the meaning of such a term as negative profitability. In fact, there's no need to argue, because any profitability is defined as profits divided by some measure. So, if there is negative profit, and negative profitability also exists.

Another thing is that this figure looks somewhat strange, because his primary role is to demonstrate how to effectively operate the investment. In economic theory, it is believed that the profitability close to zero, indicates that the company operates inefficiently that already then to speak about a situation when a firm concerned about negative profitability. And in this case not so important whether it is equal to minus two or minus ten percent.

Recommended

Staff evaluation: system and methods

Staff evaluation: system and methods

Personnel Assessment allows you to identify how competent the employees involved in the enterprise, and it is the performance of their work – the most significant factor affecting the efficiency of the company. To clarify the impact of performa...

How to start your own business: important aspects.

How to start your own business: important aspects.

Many people, tired of working for someone else, are increasingly thinking about how to start your own business. Someone wants to open a salon, someone store, and someone enough and vegetable stalls. Before you throw in the pool with his head, it is i...

business activities. its essence and basic functions

Business activities. its essence and basic functions

The Entrepreneurial activity of the citizen – is undertaken at your own risk and independent activity, which aims to systematically profit through the sale of works, goods, services, use of the property. The citizen engaged in such activities, ...

Take, for example, the profitability of sales. This figure is one of the main characteristics of the company's performance. High profitability means that the company can increase the price of products without the need to compensate for this significant cash injections into the is or the cost of the improvement of product quality.

On the other hand, this figure largely depends on the characteristics of the market. In the conditions of fierce competition the profit margin will tend to around 5%, while in a monopolistic market indicators 50% are not uncommon. Also affects the profitability of the sales volume in money equivalent. When large amounts of margin, usually higher.

In turn, the negative return on sales – this is an indication that the company put a high enough price for their products, and does not allow her to cover costs. The higher negative profitability, in absolute value, the lower is the price. At rates of minus twenty percent and less should probably not close the business. A similar trend characterizes the profitability of production. Only here in the denominator is taken to be the sum of the cost of production and its implementation.

While the return on sales was more interested in governing shareholders build their analysis on the basis of return on assets and return on equity. As in the first and in the second case, negative profitability is a signal for investors for the withdrawal of  investment from the project. The first indicator reflects the efficiency of all assets, i.e., equipment, patents, materials, etc. is low means loss of profits from their use. The second figure illustrates how working directly invested by investor funds. This figure is usually compared with an average Bank rate.

Anyway, with negative returns none of the considered metrics will indicate success. The existence of profit – the key to the existence of the company.


Article in other languages:

PL: https://tostpost.com/pl/biznes/43098-gdy-cyfry-s-smutnymi-ujemna-rentowno.html

ZH: https://tostpost.com/zh/business/34978-when-the-figures-are-sad-negative-profitability.html






Alin Trodden - author of the article, editor
"Hi, I'm Alin Trodden. I write texts, read books, and look for impressions. And I'm not bad at telling you about it. I am always happy to participate in interesting projects."

Comments (0)

This article has no comment, be the first!

Add comment

Related News

Portfolio management securities

Portfolio management securities

the Game on the securities market resembles a casino game. Exact result unknown, and it depends on quite unpredictable factors. However, the high level of income makes people and managers of corporations to keep their money in sec...

Financial results of enterprise activity in conditions of risk

Financial results of enterprise activity in conditions of risk

At the organizational and functional basis the risks of disturbance are manifested in functions: planning, organizing, motivating and control. This group of risks refers to the absolute in relation to the target function of the en...

Mode of PT. Activities in 2012 and future prospects.

Mode of PT. Activities in 2012 and future prospects.

the Tax regime is imputed income, types of activities  which completely cover the area of small business, provides business entities the opportunity to simplify tax reporting and not to confirm the expenses. The prospects for...

The liquidity of the balance sheet is one of the most important criteria of stability.

The liquidity of the balance sheet is one of the most important criteria of stability.

Without any doubt, any financial Manager must be able to analyze the figures contained in the financial statements of the entity for which he works. The benefit of this analysis is difficult to overestimate as it is based all the ...

Cost method of pricing. The pros and cons

Cost method of pricing. The pros and cons

In today's seemingly ancient Soviet times, the pricing was simple enough, requiring economists only knowledge of the foundations of mathematics. In the absence of competition, a measure of prices did not play the role that he play...

Internal rate of return - a key indicator of investment efficiency.

Internal rate of return - a key indicator of investment efficiency.

any decision relating to investments necessarily involves assessment of effectiveness. This is understandable, since it is necessary to determine the criteria that will allow you to choose the most profitable projects. Most often,...