Can You Calculate the Return on Equity if You Have a Negative Net Income?

by Jonathan Lister

A negative net income has larger consequences for a corporation than just a financial loss. Negative income can shake investor confidence and greatly affect the company's ability to distribute profits as a return on equity (ROE) to shareholders. Calculating return on equity is possible, though investors and company directors may not approve of the resulting financial figure.

Net Income Definition

In simple terms, a company's net income is its total revenue minus all business expenses, taxes and debt payments. A business with costs greater than the amount of revenue it brings in over the course of a given year suffers a financial loss. A company bringing in more money than the sum total of its financial obligations turns a profit. Net income appears as a positive or negative number on a company's annual balance sheet, which the business shares with every investor. This is one factor that measures the company's overall financial health.

Return on Equity Definition

Return on equity is the amount of a company's net income returned to investors. A business expresses this figure as a percentage. ROE is a measure of how much profit a business generates for its shareholders and investors. Calculating ROE requires a business to divide net income by total shareholder/investor equity. Equity is the total dollar amount of shareholder/investor capital in the business. For example, if a company has $1,000,000 in net income and shareholder equity of $2,000,000, the ROE is 50 percent.

Negative Net Income Calculations

It's possible for a business to have a negative net income or a financial loss if the company has more debt obligations and operating expenses than revenue. A negative net income has a large impact on ROE as investors likely lose money because the business has no cash left over to pay them. Calculating ROE with negative net income simply plugs in a negative number where a positive one would be in the formula. For example, a company with a negative net income of $1,000,000 and a total shareholder equity of $2,000,000 has an ROE of negative 50 percent. This means the company lost half of total shareholder equity for the given year.

Negative Income Consequences

Losing money is not good for a company's long-term viability. A negative net income can cause shareholders and investors to pull remaining finances from the business in the hopes of mitigating losses. This can cause the company's public stock price to plummet, which shrinks the total value of the business. A business with diminishing capital has a difficult time securing new loans to sustain operations and develop new avenues of growing the company.

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