Should you steer clear of companies reporting increased losses per share? Well, losses are not the best thing to see in a company. But having an absolute rule to avoid all such companies may be a little too extreme.
Companies sometimes do spend a lot more in one year than another, generating losses or increased losses over the year before. This might happen if they buy another company, or perhaps if they ramp up research or advertising expenditures in order to grow.
Imagine online retailer FreshFish.com (ticker: SCROD), which delivers fresh fish to America by mail. (Did you know that there's a board game called Fresh Fish? Learn about many nifty games at Funagain.com.) Let's say FreshFish lost about $30 million in 2000 and $125 million in 2001. Some investors see numbers like this and run the other way, preferring to invest only in companies reporting steadily increasing profits. Fair enough. That may indeed be the right thing to do.
Here's another perspective, though: Perhaps while net losses increased 317%, revenues grew more briskly, up 350%. If you're willing to consider companies that are not yet making money, this is a promising sign. In theory, once the company lets up on its spending, its profits will materialize or increase. Investors with the stomach for and interest in extra-risky investments that are not yet profitable will suggest that, for emerging start-ups like FreshFish.com, this is the time to plow money into advertising and into growing the business. They reason that the time for profits is later, once the company has amassed a huge seafood-by-mail-loving customer base.
You don't have to be such an investor, though. If you're nervous about a company with losses or increasing losses, then steer clear. Or study the company closely to see why it's losing money -- each situation is different, with some such companies destined for greatness and others for the city dump. You can certainly do very well in investing by sticking to profitable companies.
