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Negative Shareholders Equity | Implications | Examples | Buybacks and Losses - YouTube
Channel: WallStreetMojo
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hello everyone welcome to the channel of
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clicking the bell icon friends today we
are going to discuss Tutorial on
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negative shareholders equity they're
going to discuss all the examples also
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on the same the buyback and some of
these losses related to the cases that
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we are going to pitch over here he falls
in the foremost thing you know I'll show
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you an extract of the liability side of
balance sheet now have a look at this
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have a look at the Colgate's
shareholders equity minutes
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shareholders equity is negative that is
243 and over here it is negative 299 so
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his negative shareholders are danger
sign implying investors to stay away
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from the stock or negative shareholders
equity in is in most cases due to the
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loss accumulated over the years by the
company so in this particular tutorial
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we are going to look at so many other
details regarding the shareholders
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equity so negative shareholders equity
so let's get into the nitty-gritty of
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the same what is exactly negative
shareholders equity first let's learn
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that at the very first early foremost
thing what is negative shareholders
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equity so let's understand let's at the
very first go do the basic accounting
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equation shareholders equity is simply
the difference between the assets will
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just write assets over here and we'll
write liabilities over here so it's the
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difference between the two so if you
have 1,000 over here you have a 500 over
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here so the difference is the negative
shareholders equity now in other words
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it is amount the capital that the
proprietor brings in
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when the business is started in the case
of the company it is the amount of the
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capital these shareholders subscribe to
let me show you a fast tech movers and
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Packers balance sheet and you will get
some idea regarding the same now you can
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see over here there is a fast track
movers and Packers balance sheet that is
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on December 31st 2007 this is how the
balance sheet has been formed here is
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this total assets here's the total
liability and stockholders equity so
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assets is equal to your liability plus
your stockholders equity so this is how
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the formula has been done so as shown
over here the equity is the portion of
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the difference between the assets and
the liability so it is it also includes
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reserves that are accumulated over a
period of time through profits so if you
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are new to accounting you may really go
through the finance or for non finance
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training see on the other hand negative
equity refers to you know the negative
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balance of the equity share capital in
the balance sheet so this situation
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usually happens when the company has
incurred significant losses over a
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continuous period of time such that you
know they offset the reserves in equity
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capital appearing on the balance sheet
so it can happen because of the number
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of the other reasons - like I'll show
you I'll tell you some of the major
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reasons for the negative equity the
first and the foremost is the company is
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when the company is over leveraged in
that particular scenario which means
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that there is a huge amount of debt when
the company incurs losses this results
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in cash outflow so the company generally
borrows to stay and operate this circle
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goes on which generally results in huge
file of debt and company is incurring
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losses additionally once a company
enters into the phase of negative equity
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it results in the downgrade of the
credit rating which further results in
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high interest rate second Treasury stock
repurchase no see as per the company
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stock repurchase plan the company may by
their common stocks their results in the
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reduction of the equity so if large
amount of the common stock are
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repurchase then it can lead to negative
shareholders equity the third thing is
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dividend
payments see if the company has paid
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more amount of the cash dividend than
the profit at earn it can results in
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negative shareholders equity fourth is
creation of provision now negative
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shareholders equity can also happen with
the company has incurred or has created
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large provision for the future expected
financial liability so we have noted
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this that you know the negative earning
do not necessarily mean that he always
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have to give money to the company under
the company laws the shareholders are
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liable only to the extent that the money
they invest in the business so in the
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case of a negative equity companies if
the liquidator is they liquidate or
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dissolved probably the shareholders are
receiving nothing in exchange for the
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investment they made initially however
if the company realized more amount by
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selling of their assets selling of their
assets it may pay shareholder even
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though there is a negative equity so now
my next thing is that how does the
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negative share whole air holders equity
occurs see let me explain this concept
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you with the help of an example and I'll
take you to the whole thing first and
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the foremost thing mister is there's
this guy called mr. X okay he starts a
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business of steal coins and he thinks
that he has bought close enough to
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1,00,000 from the bank as loan this is the
amount of the loan that he has bought
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from the bank as a loan and 50000
you know let me just write
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50000 as his own contribution
which is known as equity right that is
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known as equity because that's your own
contribution so now he has purchased the
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assets for for establishing the business
close enough to let's say 25000
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for buying a building and go
down so I'll just write building and go
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down over here as B and G okay and 5000 for let's say furniture so
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every all the amounts are in dollar
right now over here so furniture is
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5000 and 60000 for
purchasing steel stock as inventory so
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I'll just write over here steel stock so
rest US dollars that that will be in
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cash so the balance will be in cash
now what happens all say so he went to
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start the business
so his opening balance sheet will appear
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something like this let me show you this
is going to be the opening balance sheet
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so in the above case the assets minus
the liabilities that is over here you
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can say 1,65,000-1,00,000 close
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enough to 40,000 so now this is
the way the balance shift will appear of
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mr. X after inputting all the details the
balance of cash inventory building
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furniture which we just note it down and
the total of assets and liability will
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be there so now so he eventually started
the business you know started selling
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steel so due to this difficult business
environment the steel prices started to
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fall and he could sell the inventory of
60000 at just let's say
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35000 he could sell or at only
$35,000 per dollor
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incurring a loss of how much 60 -
35 that gives us
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$25000 additionally he took a
loan of 40000 that was the
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additional loan of 40000 and he
bought a stock at $80000
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so the cash balance will be what
the cash balance
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we'll be which was 60,000 that was the
original from our balance sheet plus the
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35,000 of the sale of the inventory less
the amount of the new stock that is
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which gives us 15,000 is the new balance
of the stock which was first is
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60000+350000
as the same less the 80000 so
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sixty plus 35 less eighty now the
closing balance sheet will be something
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as follows let me show you this is going
to be a closing balance sheet you cash
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55 inventories ad building and go around
25 furniture five long-term borrowing
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1,40,000 and your shareholders
equity shown as capital at 50 and
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results are plus 25000 so
in the above case the assets when a
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liabilities is 1,65,000 that is your
assets less your liabilities okay sorry
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you've 1,65,000 as your
total assets less your liabilities which
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gives us 25000 as your
shareholders equity in negative so let's
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move on in the next year let's in 2017
the price fell further and this talk of
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the stock of 60000 is sold for
only let's say for only let's say 25000
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over here this talk over here is now of
only twenty five thousand and at a loss
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of 35000 that is 60000 less 25000 which
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gives us 35,000 SD loss
this will give us loss of total
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35000 so the reserves and
surplus balance is it was already in
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negative that we saw 25000 was negative less the
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35000 amount so that will give
us 60000 surpluses
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negative so the total assets in this
case will be in this case will be
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1,30,000 where the liabilities
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will be 1,40,000 making the
shareholders equity negative let me show
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you that
so cash in cash balance 80 in 2020
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now this remaining the same long-term
borrowing 1,40,000 and see over
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here 60000 what we calculate
for reserves in surplus and this will go
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negative over here there is a negative
shareholders equity right 50 and over
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60 which is a negative so I hardly
an example of negative shareholders
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equity of Revlon let me just show you if
you come down and see over here see the
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detail over here in any yellow as you
see in the you know above snapshot there
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is a huge amount of negative negative
retained earnings accumulate deficit in
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the Revlon's balance sheet which is the
leading which is leading to negative
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total equity all right as you can see
and the negative region earnings are
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mainly because of the consistent losses
from the operation especially due to the
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slowdown in the Chinese market
so here Revlon's total assets was 3023
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.5 million where the it's liabilities
was just 36.0 the 3638
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that is the total liabilities resulting
in the shareholders equity as negative
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614.8 so I'll show
you the negative shareholders equity of
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Colgate if we look at the shareholders
equity of Colgate you know you will
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note that the Colgate is profitable
company with retained earning with
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close in of the 19.9 billion
in 2016 and its shareholders equity is
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negative due to some of the reasons
which are as follow like you know the
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first reason was the Treasury stock okay
Treasury stock was the first reason see
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as per its share repurchase plan Cole
gets buybacks hold Colgate buybacks its
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share each year and we note that the
Colgate has bought 19.3
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13 billion of the common stock
until 2060 the second reason is that the
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accumulated the the accumulated over
other comprehensive income other
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comprehensive
income which is transferred via control
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X control V so this is the second reason
see this is the another reason why
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Colgate shareholders equity is negative
each year there are other comprehensive
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losses that they are making and that
increases the losses even further let me
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show you that can you see over here the
cone consolidated statement of changes
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in the shareholders equity provided us
with the comprehensive detail of the
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shareholders equity section if you see
below the Colgate consolidated changes
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in equity we note that in 2016 the
Colgate repurchase close enough to 15
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150 or 1.55 billion billion worth of
common stock also an other comprehensive
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losses net taxes - close enough to 230
in negative in 2016
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let me show you that if you see over
here the details are right in front of
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you whatever we discussed so in this
fashion we can take n number of examples
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to conclude but there is one thing that
we can discuss is that the first and
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there's this thing called thus negative
shareholders equity imply zero market
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value this is the very important thing
because just because the equity of the
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company looks books it negative okay
that doesn't mean that the company's
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share price in the market is zero very
important or available for free see
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market price is always positive they may
be well operated in terms of shares
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price and the shareholders may be very
well be purchasing them so this is
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because that the market price of the
equity is not solely dependent on the
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book value of the company it depends on
the number of factors like companies
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Outlook operating cash flow operating
cash flow of the company the realizable
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value of the assets and the company's
past records so I will show you some
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example on HP's data on how things
have workout and what exactly goes on
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with negative shareholders of equity of HP that is HP company you use a laptop now over
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here you will look at the shareholders
equity section of HP and we know that
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you know in 2015
the HP shareholders equity was
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27.278 okay
or 76 billion
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whereas in 2016 it turned out negative
to -3.88
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billion why see the primary reason
for HP shareholders equity going
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negative was the changes in the retain
earning if you note that you know the
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changes in retained earning in HP was not
because of the losses in HP in fact HP
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is profitable and reported the net on
inclusion of a coupon phone and billion
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in 2016
see HP shareholders equity non negative
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due to its separation of the HP
Enterprise that led to the reduction of
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the shareholders equity tune in negative
37.2 billion
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additionally the negative shoulders
equity was further compounded by the
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cash dividend of 8508
million let me show you that in in terms
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of the extract this is the extract of
the separation of the hundred packets
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employees data now what are the
implication of the negative shareholders
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equity the first is you know there's a
increase in the interest rate by the
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bank difficulty in getting further funds
either through loans or equity a
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reduction in the credit offered
by the creditors or they may deny credit
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sales
so there's decrease in the corporate
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valuations in credit rating and so on
and so forth so after discussing all of
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these evidence we can finally make a
conclusion that since the net worth of
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the company represents its financial
health it may be a warning signal for
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the investors to exit the investment in
in case of the negative net worth
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however there is not only the factors
that should be considered by evaluating
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the pi and sell decision so that's it
for this particular topic if you have
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learned and enjoyed watching this video
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