What Is a Negative Return?
A negative return occurs when a company experiences a financial loss or investors experience a loss in the value of their investments during a specific period of time. In other words, the business or individual loses money on either their business or their investment. The term "negative return" can refer to either a net loss across all your investments and businesses, or to a loss on any specific investment or business.
A negative return for a business is also referred to as a negative return on equity.
Key Takeaways
- A negative return refers to a loss, either on an investment, a business's performance, or on invested projects.
- When an investor purchases securities with the goal of those securities appreciating but rather they decrease in value, the investor has a negative return.
- If a business does not generate enough revenues to cover all of its expenses, it will experience a negative return for the period.
- Projects that companies invest in utilizing debt financing need to return more than the interest rate on the loan.
- Negative returns can greatly impact businesses; in terms of leading to bankruptcy as well as witnessing a decreasing share price and inability to obtain financing.
Understanding a Negative Return
A negative return is most commonly utilized when referring to an investment. Investors allocate capital to certain securities they believe will appreciate based on their research, whether that be fundamental research or technical research.
If the securities they choose appreciate in value, they will have a positive return. Conversely, if the securities depreciate in value, resulting in a loss, they will have a negative return on their investments. Investors can offset the losses in a portfolio against the gains to reduce their capital gains tax. Return on investment (ROI) is a financial metric often used to calculate an individual's returns.
Negative Returns in Business
Negative returns can also be used to refer to the profit or loss of a business in a specific period. For example, if a company generated $20,000 in revenue but had $40,000 in costs, it would then have a negative return.
Some businesses report a negative return during their early years because of the amount of capital that initially goes into the business to get it off the ground. Spending a lot of money/capital when not bringing in any revenue will lead to a loss. New businesses generally do not begin making a profit until after a few years of being established.
Investors in a company will be willing to stick around if they know that the company has the potential to quickly turn its negative return into a positive return and bring in high profits, sales, or asset turnover.
However, if a business is continuously experiencing negative returns without a solid business plan to turn operations around, then investors may lose faith in the company. This can result in a decrease in a company's share price as well as difficulty in obtaining financing. Continuous negative returns in business will lead to bankruptcy.
Negative Returns on Projects
Negative returns can also be used in relation to projects that companies invest in, usually requiring debt financing. For example, a company decides to purchase new equipment to expand its business and borrows money to do so. If the interest rate on the loan used to buy the equipment is higher than the returns the company is receiving from the new equipment, it will have experienced a negative return on that capital investment.
Example of a Negative Return
Assume Charles received $1,000 as a gift and wants to invest that money. He does research on a few stock suggestions provided to him by his friend. He decides to invest in two stocks equally: Company ABC and Company XYZ. He buys $500 of each stock.
After one year, Charles looks at his portfolio. He sees that Company ABC has appreciated in value to $600 while Company XYZ has depreciated in value to $200. While he has a positive return on Company ABC he has a negative return on Company XYZ. Also, his overall portfolio has a negative return of $200. The invested value was $1,000 and the current value is $800.
These are unrealized gains and losses and Charles can either continue holding the stocks or sell them. If he sells them the loss on Company XYZ is tax-deductible on the gains of Company ABC, reducing Charle's capital gains tax.
FAQs
Negative Return in Business
For example, a company with a revenue of $50 million and a total operating cost of $47.8 million for one year, which gives an operating income of $2.2 million. If the company incurs a net interest expense of $3 million, it will report a net loss of -$0.8 million.
What is the explanation of negative returns? ›
What Is a Negative Return? A negative return occurs when a company experiences a financial loss or investors experience a loss in the value of their investments during a specific period of time. In other words, the business or individual loses money on either their business or their investment.
What does a negative roe tell you? ›
If a company's ROE is negative, it means that there was negative net income for the period in question (i.e., a loss).
What is the risk of negative returns? ›
Investment risk is the possibility of losing money on your investment. It's also known as negative returns. There are a lot of different risks in investments including market risk (share market declines), concentration risk (all your investments in one basket) and foreign investment risk (including currency risk).
What is negative with example? ›
What are negatives in grammar? In grammar, negatives are words like not or never that negate the meaning of other words, sentences or clauses.. The sentences “I eat pineapple pizza” and “I don't eat pineapple pizza” have completely opposite meanings simply because of the negative word not.
Which is an example of a negative value? ›
Negative numbers are any numbers smaller than zero. They are represented with a minus sign (-) followed by a digit, such as -3, -2, -1, etc. The highlighted side of the number line above is the negative numbers side. They are to the left of the 0 because they have a smaller value than 0.
What does a negative real return mean? ›
A negative rate of return is a loss of the principal invested for a specific period of time. The negative may turn into a positive in the next period, or the one after that. A negative rate of return is a paper loss unless the investment is cashed in.
What is the difference between a negative return and a positive return? ›
A positive return represents a profit, while a negative return marks a loss. Returns are often annualized for comparison purposes, while a holding period return calculates the gain or loss during the entire period that an investment was held.
What causes a negative return on assets? ›
Negative return refers to a loss in the value of an investment or asset, which can be caused by various factors such as market downturns, poor investment choices, or economic factors.
Why is McDonald's ROE negative? ›
Some major, profitable companies have recently had negative shareholders' equity, including well-known restaurant chains: McDonald's, Starbucks, and Papa John's. The primary driver in these cases may have been issuing massive debt and refranchising or selling corporate-owned stores to franchisees.
Negative equity occurs when the value of real estate property falls below the outstanding balance on the mortgage used to purchase that property. Negative equity is calculated simply by taking the current market value of the property and subtracting the amount remaining on the mortgage.
Is ROE good or bad? ›
One cannot declare a particular range of ROE as a good return on equity. For some industries, an ROE of more than 25% is desirable, while for others, a figure over 15% may be considered exceptional. However, a lower ROE does not always indicate impending catastrophe for a business.
What are the reasons for negative returns? ›
Company Performance: Poor financial performance, management issues, declining sales, or unexpected expenses can reduce investor confidence, causing the company's stock price to decline.
What is a negative abnormal return? ›
Abnormal returns can be either positive or negative. Positive abnormal returns indicate that the investment has outperformed expectations, while negative abnormal returns indicate underperformance. Abnormal returns play a crucial role in investment decision-making and portfolio management.
Do you owe money if a stock goes negative? ›
No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
Is it possible to have a negative return? ›
It will happen, but not often (about 10% of the time). This highlights that negative returns occur frequently over the short-term. They are part of the investment outcomes for an investor, who wants a return better than that available from cash over the long-term.
What is a negative expected return? ›
A negative rate of return is a loss of the principal invested for a specific period of time. The negative may turn into a positive in the next period, or the one after that. A negative rate of return is a paper loss unless the investment is cashed in.
