How come some big businesses can survive years of heavy loss in income (negative profit) ?

Question

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!

Answer 1

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.)

Answer 2

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.

Answer 3

No to be funny., but look at the airline industry. What bank wants to force them into closing down and have to reposess 200(or more) used airplanes?Or, GMN, what bank wants to have a slightly obsolete auto plant on their hands. ?
There are still expenses whenther or nota co operates. A co could actually lose less by operating at a loss than not operating at all. At leastby operating thereissome income.
But taxes, rents, interest cotinue whether or not the cooperates. If revenue covers payroll and the expenses of operating and pays PART of the revenue which would continue if they were closed , so much the better.

And,believe it or not, the airline industry is turning around, much to the relief of the banks.

Answer 4

The simple answer is that these companies have enough assets (cash) to make it through negative earnings.

You can't simply look at a company's earnings to judge its financial health, you also need to consider the cash flow and balance sheet of a company. These will tell you if there are enough assets to cover the company's expenses (liabilities) and if there is enough cash flow to meet operating needs.

If a company has negative profits and doesn't have enough cash to cover expenses, then they can raise money by issuing stock or taking out loans.

Answer 5

not sure if this makes sense or not, but maybe they have heavy investments overseas, maybe they have their savings in an account overseas that is not taxed or counted, maybe all the years when they did make a good profit they invested that money and past profit is not considered current profit, (maybe they overcharged the customer in years past and saved that money), maybe they aren't coming out even but have connections and think someone (maybe the government who needs their company) will bail them out thru bankruptcy so they're letting their profits diminish, maybe theyi are using credit a lot, maybe it's only one branch of their company that's not making a profit (like one company has several branches in the same field of endeavor, but they also have companies selling other products relative or not relative to their initial endeavor which are making a profit), etc. etc. If it's a very large business then "millions" are a drop in the bucket to them so they're not overly concerned (but from the smaller guy's perspective it sounds like a lot of money).

Answer 6

Remember that any company builds up a profit buffer for a reason. This helps them cover costs when current profits are low.

Yes, there are other things that factor into this, but I'm sure everyone else has covered most if not all of them =P

Answer 7

I don't know what privatization of Profits means. I am in favor of privatizing government services. Private security companies Private Fire Protection companies Private parcel/mail delivery companies Private roads Private schools Private hospitals Private transit All perform better, cost less and produce more.

Answer 8

Hi Eric.. adf.. has it right.these large companies have so
much equity that it is easy for them to get cheap money
to operate on while they fix the earnings problems .they
also can divest themselves of their non- profitable entities. They also cut jobs to cut costs.. They also can work their
books to show a loss when in reality they are making money
Have a great Day..

Answer 9

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.

Answer 10

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)