Negative net income with increasing revenue

November 30, 2020

Q & A › Negative net income with increasing revenue
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Chin Kian Wee asked 3 years ago

Hi KC,
 
I have a question which may seem silly to ask. When a company has a negative NET INCOME while its revenue is increasing year after year, normally what are the thoughts that would come across your mind about this company? May I know the simplest way to find out where the company has spent the money ?
 
When the company has a negative income while increasing revenue for consecutive years, is that a sign of a bad company ?
 
I am more interested in finding out where the company spent the money resulting them in negative NET INCOME
 
Appreciate your teachings
 
Regards
Jared

1 Answers
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KCLau Staff answered 3 years ago

Hi Jared, good questions:
Short answer: We skip this kind of companies. Because time is limited, we rather spend it on analysing good companies with good track records.
About your questions:

  • To check how they spend the money (since they have increasing revenue but no profit) – you can look at the details in the income statement. Research on the details of the expenses – is it for cost of good sales, or R&D, or marketing. 
  • A good place to spend money is on R&D and marketing to get more market share and improve products.
  • Check cost of sales and also the gross margin. It could be gross margin is too low.