Hi
Would any one explain to me in an example in figures to show how a firm can have a negative debt to equity ratio.let say -250%
To my understanding, Debt to Equity ratio = Total Liabilities / Equity
How could a company get a minus ratio on the above formula?
Thank you so much in advance.
Kind regards
Chen
Debt to Equity does not equal Total Liabilities to Equity since there are many liabilities that are not debt (ex. accounts payable, accrued liabilities, etc.).
The ratio can be negative because a company can have negative equity because they borrowed money and then generated losses on that invested capital. Another common cause of negative equity is stock buybacks which reduce equity. Here is an example of what that looks like:
https://www.sec.gov/Archives/edgar/data/278130/000156459020000293/pir-10q_20191130.htm
companies can have a negative net worth.
if they keep losing money or do shareholder buybacks you can easily get negative equity.
@chadsandstedt
Are you the founder of Analystforum?
Thank you for your detailed explanation.
What if a company has Long term debt to equity ratio of -660%, does it mean that this company make a loss from the long term debt which it has borrowed.
Let’s say the share capital of the company are 100, in order for them to have a negative D to E ratio, their profit of the year plus retained earnings must be a negative figure, right?
Therefore, for a company to have a negative D to E ratio of -660%, the company much have long term debt of 1,980 and the total equity must be ( 100 share capital + -400 reserves).
The calculation would be like 1980/100+(-400)=6.6=660%
Am I right?
Thank you very much.
It could be a loss that was funded from long-term debt keep in mind that treasury stock is a contra equity account so it will reduce equity. If you look at a lot of real balance sheets I think you will find that negative book equity is more likely the result of share buybacks.
Your math looks correct to me on the -660%.
Yes, I started AnalystForum in 1999 when I was studying for the Level I exam.
