Loading the player...
A:

N

egative shareholder equity could show up on a company's balance sheet for a number of reasons, all of which should serve as red flags to look much closer before investing. To understand why, you need to look no further than the formula for shareholder equity:

Total Assets - Total Liabilities = Shareholder Equity

As a measure, shareholder equity reveals what the owners of a company (stockholders) would be left with if all assets were sold and all debts were paid. In the case of negative shareholder equity, the owners theoretically would owe money, although the structure of publicly traded corporations prevents common stockholders from facing actual liability.

Negative shareholder equity most often comes from the accounting methods used to deal with accumulated losses from prior years. These losses generally are viewed as liabilities carried forward until future cancellation. Oftentimes, the losses exist on paper only, which makes it possible for a company to maintain operations, despite the continued posting of substantial losses.

Other situations that can contribute to negative shareholder equity are leveraged buyouts (or borrowing), severe depreciation in currency positions and substantial adjustments to intangible property (patents, copyrights, goodwill and the like).

For more on this topic, read Breaking Down the Balance Sheet.

This question was answered by Ken Clark.

RELATED FAQS
  1. How do you calculate shareholders' equity?

    A company's shareholders' equity is calculated by subtracting a company's total liabilities from its total assets, and can ... Read Answer >>
  2. What does it signify about the state of a company if it has unusually high shareholders' ...

    Understand the meaning and calculation of shareholder equity and what a high level of shareholder equity signifies about ... Read Answer >>
  3. What is the difference between a company's equity and its shareholders' equity?

    Understand the difference and the interrelationship between shareholders' equity in a company and the company's actual total ... Read Answer >>
  4. What Are the Components of Shareholders' Equity?

    Understanding company valuation figures, such as shareholders' equity, is crucial in assessing a business. Read Answer >>
  5. What is the impact of retained earnings on stockholders equity?

    Learn about the relationship between retained earnings and stockholders' equity for a corporation and how it is reported ... Read Answer >>
  6. Does the balance sheet always balance?

    Yes, a balance sheet should always balance. The name "balance sheet" is based on the fact that assets will equal liabilities ... Read Answer >>
Related Articles
  1. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  2. Investing

    Who is a Shareholder?

    A shareholder is a person, company or other entity that owns at least one share of a company’s stock.
  3. Investing

    How To Read Apple's Balance Sheet

    We explain how to find, read, and analyze a balance sheet from Apple.
  4. Investing

    How Dividends Affect Stockholders' Equity

    Find out how dividends affect a company's stockholders' equity and how the accounting process changes based on the type of dividend issued.
  5. Investing

    Balance Sheet: Analyzing Owners' Equity

    Analyzing owners’ equity is an important analytics tool, but it should be done in the context of other tools such as analyzing the assets and liabilities on the balance sheet.
  6. Investing

    Analyzing Owners' Equity

    Analyzing owners’ equity is an important exercise for any shareholder.
  7. Investing

    UPS Stock: Capital Structure Analysis

    Analyze UPS' capital structure to determine the relative importance of debt and equity financing. Identify the factors influencing financial leverage trends.
  8. Small Business

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
  9. Investing

    Why Do Companies Care About Their Stock Prices?

    Find out how a company's stock price reflects its value to internal and external shareholders.
  10. Investing

    Calculating Book Value of Equity Per Share (BVPS)

    Book value of equity per share compares the total shareholder equity, as stated in the company’s balance sheet, to the total number of shares outstanding.
RELATED TERMS
  1. Equity

    Equity is the value of an asset less the value of all liabilities ...
  2. Shareholder Equity Ratio

    A ratio used to help determine how much shareholders would receive ...
  3. Shareholders' Agreement

    An arrangement among a company's shareholders describing how ...
  4. Accounting Equation

    The equation that is the foundation of double entry accounting. ...
  5. Shareholder Value Transfer - SVT

    A metric intended to guide shareholders in how much equity compensation ...
  6. Shareholder Value

    The value delivered to shareholders because of management's ability ...
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  3. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  4. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  5. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  6. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
Trading Center