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| *Ostroff, Fair and Company>>>Corporations |
How come some big businesses can survive years of heavy loss in income (negative profit) ? |
Hi Guys, I find it confusing to find some companies report negative earnings for a few years. (sometimes by alot, few millions for example) Can a company really take that sort of heavy losses for years? How does it get the funds to survive the following year? Or am I just missing out some other factors :) Hope that you can enlighten me, thanks! There are several reasons. First of all, large corporations have a lot of stored wealth in their assets and can afford to lose money in operations with little impact. Another thing you have to look at are the large expenses that don't come from spending money. The greatest is depreciation, amortization and depletion (these are all forms of depreciation but for different kinds of assets). A company can buy buildings, equipment, and other long-term assets and depreciate them over the following years. Even though they haven't spent any money, they get the expense portioned out over the years. Result for income statement: no revenue, no money spent, additional (large) expenses. Another big reason for the losses comes from the use of investor cash for either operations or research and development. I used to work for a company that was prodigious at getting investors to give money, they would then lose it in operations and ask for more, and the investors would give it. Result for income statement: no income (investor cash is not a revenue) but additional expenses from using it. If you want to know how much "cash" is being lost, you have to look at the Statement of Cash Flows. You'll sometimes see a company with a loss from operations and a gain in cash, and it's possible for them to be in a better position because of it. (One of the answers above mentioned Enron appearing so successful when they were actually bankrupt. That's because they were running at least two sets of books, one real, one fake, and the fake one was using a concept called "mark to market" accounting, which is a legalized form of fraud that few companies knew how to take advantage of. That was a totally different situation. Enron actually lied on their books and allowed the false reporting to snowball.) take away benefits from current employees, laid offs, take awya % from pay, Insurances, etc...... I hear you. I wish I could lose money during a year and still get by on living expenses and paying the bills, with money left over for myself!!! They survive because they capture new markets, which means growth and more income. EDIT: Alright, that was'nt enough. When a company becomes financially unstable (insolvent) they can continue operations under bankruptcy laws. EDIT: Negative earnings does'nt mean there's no money...it means they did'nt reach a predicted goal. (less than normal return) Well they do not post salaries for a purpose. Low paid workers get lower pay and fewer benefits. The companies can either take a tax loss. More than likely though the government bails these companies out like American Airlines and Trump Enterprises which our tax dollars were used to bail out their bad management decisions. There funds may not survive the following years that is why they sell shares in these companies, but they count of the fact that not all the investors want there money right away. Enron was worth more than three billion dollars and it crashed because all the major investors pulled out at one time and crashed the company making huge profits and depleting the pensions and the 401K's of their workers. That is why you do not buy stocks and be naive enough to think you can use them for retirement purposes. Do not pay into 401K's they are a scam for these companies and more likely than not they will get rid of you before you can even profit from them. I hope this helps. Well, they have deep pockets. They can tide over losses for a few years either by dipping into reserves or by taking bridge loans to fill the gap between income and expenditure. My management background. |
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