What Is a Shareholder Deficit?

A shareholder deficit, also known as “negative book value” or “negative equity,” is a term denoting that a company has more liabilities than assets. This value is often seen in financial reports, where the company reviews its equity. Investors looking into a company’s business standing have to consider this factor carefully to help them evaluate profitability.

What It Means: Formulaic Analysis

When a company’s total liabilities are subtracted from its book value of assets, the shareholder’s equity is derived. When the total liabilities or debts are greater than the book value of assets, a negative sum appears. Any changes in the stockholder deficit will determine whether the enterprise is still lucrative enough or is high risk.

Possible Interpretations and Implications

The absence of or drop in equity that creates the deficit does not necessarily mean that a company is losing money. For example, it could mean that the firm decided to buy back its stocks from investors when the report was made. Shareholders are also not directly responsible for the debt. Their chances of getting return-of-investment aren’t totally lost, although it won’t come swiftly.

As a Form of Investment

A shareholder’s deficit could still prove to be a good investment as long as the company shows stability in its general business model. Although stock value is low, substantial losses may still be singly occurring or are mere passing events, so buying shares may still prove wise. Growth purchases, as when a firm incurs debts to buy into a new market, can create a justifiable stockholder deficit.

How it’s Resolved

Differences between book and market values can be attributed to capital gains due to sales of the firm’s real estate assets, valued as historical costs. This is in direct contrast to properties such as furniture, equipment or vehicles, which depreciate over time and are sold on the principle that the income they generate has to be taken against their useful lives. As the company’s cash flow increases, it can pay down debts, thus decreasing its shareholder deficit. Retained earnings also increase with rising net income; this consequently lowers the deficit or eradicates it completely.