What Economic Recovery? Half Of U.S. Companies Are Losing Money

Authored by Baruch Lev via Knowledge Leaders Capital blog,

Baruch Lev is the Philip Bardes Professor of Accounting and Finance at the Stern School of Business, NYU. This article first appeared on the Lev End Of Accounting Blog and is shared here with his permission.

We are inundated with great economic news: The stock market is at all-time high (despite wide fluctuations), unemployment is the lowest in two decades, consumer confidence is the highest in many years, and corporate profits are surging from quarter to quarter. A real economic recovery to be sure.

So, you will be shocked to see the following figure (developed with my colleague Feng Gu), which I haven’t seen anywhere else, nor mentioned by economists and pundits. The figure shows the percentage of U.S. public companies reporting an annual loss, from 1960 through 2016. The two curves portray the percent “losers” from all public companies (lower curve), and the percent “losers” from all technology and science-based companies (computers, software, pharma, biotech, etc.), presented by the upper curve.

The main finding: Both curves are fast increasing.

The percent losers from all companies increased from 18% in 1980 to 46% in 2016.

For high tech and science-based companies the losers reached 69%! In 2016.

The loss reporting epidemic rivals now the flu. High tech and science-based enterprises seem to be perennial losers rather than growth drivers.

So, where is the economic recovery if half the companies are reporting losses? Shouldn’t a recovery be reflected by an increasing number of profitable companies? I felt that there is something fishy in those GAAP-based earnings numbers, leading me to look deeper into the data.

The effect of one-time (transitory) items: Since the FASB switched in the 1980s to a “balance sheet model,” emphasizing the valuation at fair (current) values of assets and liabilities, corporate income statements increasingly included the consequences of these valuations: one-time items, such as gains/losses from adjustments of assets and liabilities to fair values, impairments of assets and goodwill, restructuring costs, etc. Most of these items reflect past events and are irrelevant for forecasting future firm performance―the focus of investors. Indeed, analysts routinely disregard some of these items in their “Street Earnings,” and managers delete them from their non-GAAP earnings.

So, I computed the percentage of loss firms due to one-time items (“special and extraordinary items” and restructuring charges) during 2010-2016. Namely, firms that would have reported a profit if the one-time charges were eliminated. These percentages ranged between 8-10% for all loss reporters, and 5-8% for high tech and science based companies. So, one-time items are one reason for loss reporting, though not the major one. I kept digging into the data.

The effect of intangible investmentsInternally-generated intangible investments―R&D, brands, IT, human resources, organizational capital―are immediately expensed, following GAAP rules, despite the obvious fact that in modern economies these investments are the most important and consequential long-term value-drivers of business enterprises. This massive expensing in the income statements of U.S. companies―total corporate investment in intangibles during 2016 exceeds $2.1 trillion (yes, trillion!)―turns the profits of many successful and promising companies into losses. Tesla’s massive losses are mainly due to the expensing of R&D ($834 million in 2016).

So, how many loss reporting companies would have reported a profit if their R&D was capitalized? The data show that 9-10% of all “losers” and 20-26% of the loss reporting high tech and science-based companies would have reported profits if R&D were not expensed. Think about it: a quarter of all high tech and science-based firms report losses just because they invest in future growth. And you call this accounting?

But R&D is just one, and not even the largest, intangible expenditure. Other intangible investments, such as on IT, brands, human resources, designs, consulting engagements, etc., are not reported separately in the income statement by firms, and generally “buried” in SG&A (sales, general and administrative) expenses. So, what is the percentage of loss reporting firms who would have reported profits if SG&A expenses were added back to earnings (SG&A includes R&D in my data source―Compustat)? This is a big number: 43-51% of all losers and 50-56% of science-based and high tech losers during 2010-2016 would have reported profits before SG&A.

So, if I add the two major reasons for loss reporting - intangible investments and one-time items - I account for 50-60% of all the loss reporting. The fast increase in loss reporting portrayed by the figure above is thus mainly due to the increasing proliferation of new-age firms (high tech, science-based, telecom, media, etc.) whose investments are mostly intangible, and their reported earnings seriously misstated by GAAP-based financial reports.

So, while the above figure seems to contradict the economic recovery, it really doesn’t. If the archaic, detached from reality accounting rules will not be changed, we will continue to witness more and more “losing companies,” by GAAP misleading yardstick, while the economy continues to prosper. The real losers are investors who rely on GAAP-based financial reports.


Retired Guy lloll Wed, 03/07/2018 - 22:23 Permalink

GAAP reports what happened. The author would replace it with management estimates galore. No thanks. One time losses are still losses. Who is responsible? The same management that claims they are just freak events. Over paying for an acquisition and the one time write off is not something to be forgiven. R and D are real expenses. When the profits start rolling in we finally know this money was well spent. Until then we must trust management's word that they did not blow a bundle on perpetual motion. The author even questions the reality of Sales and General expense. How in the world else can one handle this expense. Dude, the money is gone.

Intangibles: Isn't that another name for hot air? When I check out a company the first thing I do is check for intangibles. If the balance sheet is loaded with hot air I strongly suspect the management is a bunch of baloney boys hiding their mistakes in plain view. Give me real cash profit and real dividends to prove it.

In reply to by lloll

lester1 Wed, 03/07/2018 - 18:59 Permalink

Massive trade deficits..

Massive budget deficits..

40 million Americans on Food stamps..

Millennial debt slaves..


What economic recovery???.. 🤔


11b40 Wed, 03/07/2018 - 19:07 Permalink

You can count it any way you want, but it takes real cash flow to keep the doors open.  Too many companies are stretched very thin, just like households, and if the wind shifts, crisis begins.

DipshitMiddleC… Wed, 03/07/2018 - 19:11 Permalink

yeah..over at /r/the_donald those (((patriots))) are squawking about the net increase in jobs...most of them are probably part time or service level jobs and not "good jobs"


ive been looking for a new job for the past 3 months..its hard to find anything really. everything dried up it seems :(



Manipuflation Wed, 03/07/2018 - 19:20 Permalink

"Other intangible investments, such as on IT, brands, human resources, designs, consulting engagements, etc., are not reported separately in the income statement by firms, and generally “buried” in SG&A (sales, general and administrative) expenses."

Interesting this is.  On my P&L it appears.  Knowing what it is no one does.

I'm new to the company and I finally saw a store level P&L(not for my store).  SG&A is on there and was a fairly large number.

That said, who dares show a profit?  This is all about taxes and not profitability.

Tapeworm Manipuflation Wed, 03/07/2018 - 22:16 Permalink

I have been a penny pinching owner of a moldmaking shop for decades. My taxes were crushing until I loaded up on some expensive machine tools that I was able to write down on what used to be called "accelerated depreciation".

 The machines do not last long enough under some of the varying tax treatments. My office has crappy furniture from 1970, yet the taxsuckers rate it as new.


In reply to by Manipuflation

csmith Wed, 03/07/2018 - 19:21 Permalink

"Shouldn’t a recovery be reflected by an increasing number of profitable companies?"

And why would that be? Nothing more than a classic Pareto distribution. The profitable and strong get stronger and more profitable. Aggregate profits rise, while the number of losers flatlines or rises.

GreatUncle Wed, 03/07/2018 - 19:22 Permalink

Lol fucking laughing so hard. 2 points ....

In a maxed out world then you ain't growing so there is little to no profit to be made that is the cap.

Haha mofo's in a NIRP world design is for you to lose that profit.

Now fuck off and tell me something I do not know because if you are not P2P you ain't making it.


Yen Cross Wed, 03/07/2018 - 19:23 Permalink

  Shhhh... Don't tell the black Jimmy Cramer -Charles Payne- over at Faux Business about that.

 He's too busy pimping small caps, biotech, and software crapola, with P/E ratios in the stars.

Manipuflation Yen Cross Wed, 03/07/2018 - 19:49 Permalink

At WMT, many of the local markets' largest profit centers are...do you want to take a guess?  Pharmacy D38 and OTC Pharmacy D40.  I rule with an iron fist over those areas!  Alright, no I don't on Pharmacy 38 because I can't go in there with a pharmacist with me because it would be a felony to do my job. 

I'm thinking, "Alright bitch give me all of the opioids!  What, you ran out already because of all of the prescriptions you filled?  Alright bitch, we gonna raise some prices up in here from now on...CASH ONLY."

In reply to by Yen Cross

itstippy Wed, 03/07/2018 - 19:30 Permalink

The Tippy household has a reasonable income and low carrying costs (no debt, modest home so reasonable property tax, no expensive hobbies).  On paper we should be well into the green at the close of each year.  But for ...

These damned one-time charges keep popping up!  Every year it's one or more unforseen one-time charges.  We need a new washing machine.  I need dental work.  The roof needs replacing.  The driveway needs replacing.  Mrs. Tippy gets a bug for a new car.  The cats get dengue fever.  It's been this way for thirty years together!

This year for sure we'll be able to stash a bunch of coconuts.  Every conceivable expense has been met.  No more surprises!

(What's that odd "foof, foof, foof" sound coming from the furnace?)

I Write Code Wed, 03/07/2018 - 19:30 Permalink

The money losers pretend to make a profit now and then so they can continue to write off the loses, while the money makers pretend to lose money every year so they don't have to pay taxes.

So obviously, if they're all losing money, they're really making money.

JibjeResearch Wed, 03/07/2018 - 19:37 Permalink

A globalization will lead to a consolidation of firms because this drives down marginal cost.

Right now, Broadcom is trying to take over Qualcom.  This is a natural process as firms are trying to win on the global stage by lowering marginal cost.  Those firms that can not get marginal cost to Zero will be bought. 

In the future, we will have regional financial warlords controlling global corporations.  The top 10% most likely are linked to those warlords, the top 1%.

For little people like us on ZH must have assets to maintain good living.  We can't help every body, but ourselves.

Hyjinx Wed, 03/07/2018 - 19:49 Permalink

Of course science & tech will be losing money for a long time - it is all about investment that pays off in the future.  It is therefore no surprise that with so many science & tech companies more companies are now in the red when compared to the 1980s.  Firms in biotech have much longer investment-to-product lines then they used to because many are breaking completely new ground in things like real gene therapy.

adr Wed, 03/07/2018 - 20:39 Permalink

Take your favorite big box company and their reported revenue. Divide that by the number of stores and then by 365. You now have a per day sales figure for each store.

Yeah, you have online sales. However they will also have the percentage of online revenue available. You can subtract that.

What you end up with is ludicrous sales figures like $52k per day per store. Anything under that figure needs to be added to the next day, and so on.

My wife worked at a store that required $16k per day to hit stated revenue. On a good day they made $4500 and were in the top 10% of stores in the chain. How can a chain generate stated revenue if the best stores can't come close, not even half what is required?

It's all fake.

haruspicio Thu, 03/08/2018 - 07:38 Permalink

But losing money after all the tax dodges, avoidances and evasions wit shelters all around the globe.

American businesses don't stay in business when they really lose money,