Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
Shareholders' equity is the difference between a company's assets and liabilities.
It represents the amount of money that belongs to the company's shareholders.
When shareholders' equity is negative, it means that the company owes more money than it owns.
This can be a sign that the company is in financial distress and may not be able to meet its obligations to its creditors.
Why you should aim to avoid companies with negative shareholders' equity
Increased risk of bankruptcy: Companies with negative shareholders' equity are more likely to go bankrupt than companies with positive shareholders' equity. This is because they have less money to cover their debts and expenses.
Difficulty securing financing: Banks and other lenders are less likely to provide loans to companies with negative shareholders' equity. This is because they are seen as a higher risk investment.
Skewed financial ratios: Negative shareholders' equity can skew important financial ratios, such as the debt-to-equity ratio. This can make it difficult to assess the company's financial health.
Examples of companies that have filed for bankruptcy with negative shareholders' equity
Some well-known companies that have filed for bankruptcy with negative shareholders' equity include:
Lehman Brothers
General Motors
Hertz Global Holdings
Enron
WorldCom
TWA
Conclusion
If you are considering investing in a company with negative shareholders' equity, it is important to carefully consider the risks involved. You should also research the company's financial history and future prospects to make sure that it is a sound investment.
However, there may be exceptions. Such as when Fortinet's shareholder equity turned negative for the first time in 14 years, because their companies management is acquiring their shares aggressively.
But for a general rule of thumb, if you would want to save time & adding unnecessary risks to your portfolio I would advice avoiding companies with negative shareholder equity when you are looking for new companies to add to your portfolio.
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