Simplified definition: It is a financial metric that shows the percentage of revenue that ends up as a loss after deducting all of the company's expenses. In other words, it tells us how much the company loses for every riyal it generates in sales. This indicator is used to measure the extent of the company's cash burn and its ability (or, more accurately, inability) to cover its costs through its business activities.

How is it calculated?

Loss margin = (Net loss ÷ Total revenue) × 100

Note: It is usually calculated as a percentage. The higher the percentage, the greater the loss compared with the volume of sales. (A net loss simply occurs when total expenses exceed total revenue.)

Example: Suppose a delivery-focused startup technology company generates sales (revenue) worth 50 million riyals. However, due to extensive marketing campaigns and discounts to attract customers, its total expenses reach 70 million riyals. This means that its "net loss" is 20 million riyals. To express this as a percentage, we divide 20 million by 50 million and multiply the result by 100, giving us 40%. Therefore, the loss margin is 40%, meaning that the company loses 40 halalas for every one riyal that enters its coffers from sales!
What does this mean for you?

  • High or increasing level: This clearly indicates that the company is facing structural problems, either because it is pricing its products below their actual cost or because it has failed to control its expenses. If this situation continues and cash liquidity is depleted, the company may be forced to borrow heavily or face the risk of bankruptcy.
  • Declining level (a reduction in the loss): This is a very positive sign (especially for startups), as it indicates that the company has begun to control its costs and that its revenue is growing faster than its expenses. This means it is on the right path toward reaching the "break-even point" and beginning to generate profits.
  • Context and industry characteristics: A loss margin is not necessarily bad in every circumstance. In fast-growing technology companies, it may be intentional in order to gain market share. In traditional, stable companies (such as retail or manufacturing), however, any loss margin is considered a serious warning sign requiring urgent intervention by management to correct course.

Frequently asked question: Why do investors sometimes buy shares in companies with a high "loss margin" that continuously burn through cash?

Answer: Some companies (especially those in the technology and e-commerce sectors) adopt a "cash-burning" strategy in their early stages. The goal is not immediate profit, but rather to rapidly acquire the largest possible number of customers, change consumer behavior, and build infrastructure that is difficult for competitors to match. The investor injects money while betting that once the company dominates the market and reaches maturity, its loss margin will gradually shrink and turn into large, sustainable profit margins, just as happened with major global companies in their early days.