Can Debt/ Equity ratio be negative?

Negative “gross debt / equity” would mean that the book value of equity is negative, in which case:

  • the book value of assets is less than the book value of liabilities, which could mean:
    • if the assets and liabilities are fairly valued, that the equity is worthless, either on a (spot) liquidation basis or (more worryingly) on a going concern basis
    • nothing if book value of assets does not properly reflect fair value (eg if some properties are fully depreciated but carry significant economic value) or if some liabilities (eg non cash deferred tax liabilities) will never lead to disbursements
  • or to put it differently, the sum of equity injected in the business plus accumulated earnings minus dividends paid out is negative, which could mean (among others):
    • that the business has been loss making on a cumulated basis, either due to operating losses (eg startup or troubled company), high interest burden (eg overlevered company) or funky “non cash” charges (eg goodwill amortization)
    • that significant dividends have been taken out, presumably financed with debt

Negative Net debt / Equity could mean

  • either the same as above
  • or alternatively negative net debt and positive equity, in which case, the business is “net cash” positive (ie has more cash & equivalents than it has financial debt) and book value is positive
    • which is usually a good sign (eg cash generative business, conservative management)
    • but if taken to extremes could also signal that management is hoarding cash for no reason meaning poor capital allocation skills and little regard for shareholders

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