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Negative shareholder equity on a company’s balance sheet is a red flag that should prompt potential investors to take a closer look before committing their money.

Shareholder equity equals total assets minus total liabilities. It reveals how much would be left for a company’s stockholders if all assets were sold and all debts paid. Theoretically, negative shareholder equity means the stockholders owe money. But realistically, common stockholders are protected from such a liability by the corporate structure of publicly traded companies.

When shareholder equity is negative, it’s often due to the accounting methods used to deal with accumulated losses in previous years. Such losses are generally viewed as liabilities that carry forward until future cancellation. Often, they exist only on paper, which enables a company to stay open even with large, ongoing losses.

Leveraged buyouts, depreciation in currency positions, and substantial adjustments to intangible property, such as patents and copyrights, can also contribute to negative shareholder equity.  

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