When the numbers are sad. Negative profitability

Despite the fact that no entrepreneur wants to work at a loss, the business is very unpredictable, and situations where the company during the period under review not only increased capital, but even reduced it, are not uncommon. Negative profit, also called loss, largely distorts all calculated management indicators. Indeed, when the main indicator, profit, literally screams about the need to change something, there is not much point in the side indicators.

Considering one of the main indicators of the efficiency of the enterprise - profitability, we can immediately note that with negative profits, this indicator is practically useless. By the way, until now many people doubt whether such term as negative profitability makes sense. In fact, there is no need to argue, because any profitability is defined as profit divided by a certain indicator. So, if negative profit exists, then negative profitability also exists.

Another thing is that this indicator looks somewhat strange, because its main role is to demonstrate how effectively the invested funds are working. In economic theory, it is believed that profitability, close to zero, indicates that the company is operating extremely inefficiently, which is already speaking about the situation when the firm is concerned about negative profitability. And in this case it is not so important whether it will be equal to minus two percent or minus ten.

Take, for example, the profitability of sales. This indicator is one of the main characteristics of the company's performance. A high profitability index means that the company manages to increase the price for products, without the need to compensate for this by significant cash injections in advertising or the costs of improving product quality.

On the other hand, this indicator largely depends on the characteristics of the market. In a highly competitive environment, the profitability of sales will tend to reach 5%, while in the monopoly market, 50% will not be a rarity. Affects also the indicator of profitability sales volume in monetary terms. With large volumes, profitability is usually higher.

In turn, negative profitability of sales - this is an indicator that the company has put an insufficiently high price for its products, which does not allow it to cover costs. The higher the indicator of negative profitability in absolute value, the lower is the price. At the rates of minus twenty percent or less, it is probably necessary to completely shut down the business. A similar trend characterizes the profitability of production . Only here in the denominator is the sum of the costs of production and its realization.

While the profitability of sales is of more interest to managers, shareholders build their analysis on the basis of return on assets, as well as return on equity. As in the first, and in the second case, negative profitability is a signal for investors to withdraw investment from the project. The first indicator reflects the performance of all assets, i.e. Equipment, patents, materials, etc. Its low level speaks about the lost profit from their use. The second indicator illustrates how the funds invested by the investor directly work. This indicator is usually compared with the average bank rate.

Anyway, with a negative profit, none of the indicators considered will not indicate success. The presence of profit is the guarantee of the company's existence on the market.