What Is an Operating Loss (OL)?
An operating loss occurs when a company's operating expenses exceed gross profits (or revenues in the case of a service-oriented company, generally speaking, instead of a manufacturer). An operating loss does not consider the effects of interest income, interest expense, extraordinary gains or losses, income or losses from equity investments or taxes. These items are 'below the line,' meaning they are added or subtracted after the operating loss (or income, if positive) to arrive at net income. If there is an operating loss, there is usually a net income loss unless an extraordinary gain (e.g., sale of an asset) was recorded during the accounting period.
Understanding Operating Loss (OL)
An operating loss could indicate that a company's core operations are not profitable and that changes need to be made either to increase revenues, decrease costs or both. The immediate solution is typically to cut back on expenses, as this is within the control of company management. That may entail layoffs, office or plant closings, or reductions in marketing spending. An operating loss can be expected for start-up companies that mostly incur high expenses (with little or no revenues) as they attempt to grow quickly. In most other situations, an operating loss, if sustained, is a sign of deteriorating fundamentals of a company's products or services. However, that's not necessarily the case if a company is spending more money in the short-term to hire additional employees, conduct a fresh sales and marketing campaign or lease extra office space in anticipation of expanded business in the future. In such a scenario, a company may be hit with a few or several quarters of operating losses until the bump-up of these expenditures declines and the benefits of added spending begin to manifest in the top line.
Operating Loss Example
For a company that manufactures products, gross profit is sales less cost of goods sold (COGS). Huntsman Corporation in 2009, the year that the Great Recession took hold, recorded an operating loss of over $71 million. That year gross profit was $1,068 million, while operating expenses comprising selling, general and administration (SG&A), research and development (R&D), restructuring, impairment and plant closing costs totaled $1,139 million, leaving the chemical maker with an operating loss. The last expense line item was $152 million. Such expenses in most cases are considered non-recurring, which means that a normalized operating income/loss number would exclude the charge. Instead of the operating loss, then, an "adjusted" result would be an operating profit of $81 million.