Decline

DEFINITION of 'Decline'

A decline is when a security's price falls in value over a given trading day and subsequently closes at a lower value than its opening price. A decline can happen for any number of reasons, including a reduction in the firm's intrinsic value, or as a result of the security's price dropping below its support level.

BREAKING DOWN 'Decline'

Analysts are often asked to describe the direction of a particular stock. Words such as reduction, decrease, downturn, downswing, downtrend, devaluation, depreciation, diminution, ebb, drop, slump, plunge and nose dive, in addition to decline, are all used to describe a negative growth trend over the previous time period. The decline is generally in share price, revenues, expenses, earnings, earnings per share, assets, liabilities, shareholder's equity and cash flow and is calculated using a simple growth rate formula. The calculation subtracts the previous number from the most recent number and then divides the difference by the previous number. If the number is positive, there's an increase in growth. Likewise, if the trend is negative, there's a decline in growth.

Example

If a company has sales of $100,000 in year 1, and those sales go up by $50,000 in year 2 to $150,000, the growth rate is equal to 50%. The calculation is $150,000 minus $100,000 divided by $100,000. The answer is $50,000 divided by $100,000, or 50%. This is an example of an increase in sales, but what if sales declined to $50,000 instead? The calculation is slightly different. The previous sales number is the same, but the most recent or current number is different. Instead of being positive, it is negative. The calculation is $50,000 minus $100,000 divided by $100,000. The answer is negative $50,000 divided by $100,000, or negative 50%. In other words, sales in the company declined by $50,000 in year 2, and that decline represents a 50% decrease over the previous year.

How Decline is Used

In general, analysts look at a decline as being indicative of poor performance. However, a decline in some line items can be a sign of strength. For example, a decline in expenses may signal improved business efficiency. A decline in debts, may be a sign of increased cash flow or improved earnings. A decline in taxes, for some, is a sign of improved management, but for others, it is sign of poor corporate responsibility. A decline in earnings is a bad thing. However, a decline in the number of shares outstanding creates an increase in earnings per share, which on the surface is a good thing. This is why some companies borrow money to repurchase shares when earnings are declining. Ultimately, the interpretation is in the eye of the investor.

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