Investing for Beginners , investing

Loss (net loss) is a financial situation of the company when its revenue is lower than expenses. It is natural that every company tries to receive a profit instead of a loss, but not every succeeds that. Some companies are more profitable some less while others fails to earn any earnings and turn in to a loss.

If company is at loss, it doesn’t mean that there is no way for turnaround story. At first, reasons for such bad financial result must be found. If the reasons are inside the company (but competitors are making profits for the same period) then change of company’s strategy or change of management could help to improve the results. If the reasons are outside the company and all companies in the same industry niche are suffering losses, then it is harder to escape such situation. If all competitors fail to earn profit, one of two reasons is most probable. The first one is that sector is cyclical and cycle is down. In this case time will fix the problem and sector will become profitable naturally. The second most probable reason is that industry niche is being pushed out by some more modern products. Such example could be when cathode-ray tube TVs were pushed out by LCD and Plasma TVs. If company that manufactures outworn products fails to adopt for manufacturing of new generation products, it naturally has to disappear because of losses. 

When corporation turns to losses from profits first thing that firms are doing is cutting expenses. And till some level it may help to sustain profits. But if company will suffer the decrease in sales parallel, then cutting of expenses won’t help forever. The motivation of employees worsens and it makes to lose market positions even further.

The period of losses is limited for the company if loss is high. Company at loss can use inner recourses as long as they are available and when those resources ends, shareholders should put more capital investments in the company or business should be closed. Income statement (one of the financial statements) indicates about company’s loss or profit.

Investment in stocks of unprofitable companies is very risky.

(2) Loss also may be incurred from investment when selling price of investment is lower than the acquisition price.