What is a Decline?

A decline is a situation in which a security's price decreases in value over a given trading day and subsequently closes at a lower value than its opening price. It can be used in reference to other metrics, such as revenues and expenses, used to measure performance of the given security. A decline can happen for several reasons, including a reduction in the firm's intrinsic value or as a result of the security's price dropping below its support level.

Understanding Declines

In addition to decline, investors and analysts use other synonymous terms, such as reduction, decrease, downturn, downswing, downtrend, devaluation, depreciation, diminution, ebb, drop, and slump to describe negative growth or a negative growth trend. 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 the growth rate formula, which is the product of the final value less the starting value divided by the starting value multiplied by 100. If positive, there's an increase in growth. If negative, there's a decline in growth.

Key Takeaways

  • Decline refers to a drop in a given security's price over the course of a given trading day.
  • A decline can occur due to various reasons, such as a reduction in a firm's intrinsic value or the security's price dropping below its support level.
  • Analysts use decline in value as an indicator of performance.

How Declines are Used

In general, analysts look at a decline as being indicative of poor performance. However, a decline in some financial statement 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 indicative of increased cash flows or improved earnings. A decline in taxes carries different interpretations depending on the studied target. For some, it is a sign of improved management, but for others, it is a sign of poor corporate responsibility. However, most agree that a decline in earnings is unfavorable. Just as with any measurement, the interpretation can vary. Alone, a decline does not give the full picture of an organization's health and operational efficiency. Used with other measurements, it is a useful tool for analysis.

Example

If a company has sales totaling $100,000 in year 1 and sales totaling $150,000 in year 2, the growth rate is 50% (($150,000-$100,000/$100,000) x 100). In this example, it is evident that sales increased, which would equate to increased growth. If sales decreased in year 2 by $50,000, the growth rate would be -50% indicating a decline in growth (($50,000-$100,000/$100,000) x 100).