A negative return is a loss on an investment. This financial term can be used to describe individual investments like stocks and bonds as well as institutional activities like running a company. Negative returns are not necessarily abnormal, but they can be a cause for concern when they occur consecutively and there are signs that recovery will be difficult. Investors may choose to divest themselves of potentially fragile investments in the interest of protecting their overall portfolios.
Companies, especially when they are new, may sometimes report negative returns. This usually occurs when they invest substantial capital in long term projects, and do not generate enough payments to repay this investment. In situations like this, the negative return represents a temporary problem in a given financial period, but may be a sign that the company will generate bigger returns in the future. For example, once an expensive new factory gets on line and increases efficiency, the company could sell more products.
Publicly traded firms must make regular financial declarations for the benefit of investors. If they have negative return in a given reporting period, their annual reports can provide information about why, along with projected returns in the future. This allows investors to determine if they should buy or retain shares, or avoid the company. Multiple quarters where a company is not generating income can be a cause for concern, as they may indicate that the company is foundering and will not be able to generate profits.
Individual investments like stocks and bonds can also generate a negative return. Investors may decide to retain these investments in the hopes of waiting out a problem like an unusually low stock price. They could also sell them to abandon the position and reduce the risk of further losses. The best strategy can depend on the security and the situation. If prices dip temporarily under new ownership, for example, waiting them out may be advisable because they may rise again.
Business owners, whether managing publicly traded or private businesses, need to consider negative return in their business planning strategies. For public companies, an obligation to shareholders may require a firm to file for bankruptcy protection to allow itself to reorganize if it experiences several bad quarters in a row. At a private company, an owner may determine that further investment would be a case of throwing good money after bad, and it may be time to cut losses and move on to a new project.
