Negative Equity? Horrible ROE? Why?

This topic comes up somewhat frequently and can cause a lot of concern. Often times it's not a big deal, sometimes it can be a huge issue. This article will discuss what to know what it means. 

Lets take a look at the basics...

Shareholder Equity = Total Assets - Total Liabilities

If our liabilities are greater than our assets, this is going to yield a negative equity, or, in other words, the shareholders are responsible for existing debt obligations. That sounds pretty bad but maybe it isn't. Lets dive a little deeper. 

Often times this is simply a byproduct of the way things are reported and although on paper show a loss, are not in the "real world". If there is a lot of depreciation or "Non-Cash Expense" over a few periods, it can appear as though the assets are less than the liabilities. Remember that deprecation is a tax write off, so in an effort to run tax efficiently, depreciation can be your friend.

Ask questions and get to the bottom of things. If you are going through your report with a client and the ROE or Debt-to-Equity looks bad, get to the bottom of the situation and explain whats going on.