Negative Shareholders’ Equity is an important measure that can help us determine the financial health of a company. There are three main constituents of a balance sheet: Assets, Liabilities, and Shareholder’s Equity.
The Shareholders’ Equity, in general terms, represents the amount the owner has invested in the business. It may include retained earnings, paid-in capital, share capital, etc.
And, in the Balance Sheet:
Assets = Liabilities + Shareholders’ Equity
Negative Shareholders’ Equity
From the above, we can deduce that,
Shareholders’ Equity = Assets – Liabilities
When Shareholders’ Equity is positive, then that means the business assets are greater than its liabilities. So, in the event of a downturn, the company can survive. But, the opposite happens when the liabilities are greater than the assets. That results in Shareholders’ Equity turning negative.
The Shareholders’ Equity also shows the amount the shareholders would receive if the assets of the business are to be liquidated. So, if it turns negative then, shareholders won’t receive anything.
If you are about to invest in a business that has got negative shareholders’ equity then investors should carefully analyze the company and find the reasons thereof.
There could be various reasons: high debt, the business incurs losses, deficits, etc.
In conclusion, it is a measure of a company’s financial health. If the business you intend to invest in is listed on a stock exchange. Then, do check their Quarterly Earnings Report. In the consolidated Balance Sheet, you would get the data on Total Stockholders’ Equity.
