How to Calculate the ROE With Negative Stockholders Equity

by Cynthia Gaffney ; Updated April 19, 2017
Investors must consider additional information when assessing a negative ROE.

Investigating a company's return on equity (ROE) can help gauge a company's ability to invest its resources to produce profits. Shareholders invest money into the business by buying its shares, and look to the company to use the funds to enhance its earnings and increases the stock's value. Calculating a company's ROE with a negative shareholders' equity is simple mathematically, but the interpretation of the ratio's result becomes somewhat more complex.

Step 1

Locate the balance sheet for the company you want to analyze. You can select more than one accounting period to analyze, or combine them and use the average result in your ROE equation.

Step 2

Locate the income statement. The income statement provides a company's net income for its most recent quarter, which you will use in the ROE calculation.

Step 3

Calculate stockholders' equity using the information in the stockholders' equity section at the bottom of the balance sheet. If you are calculating the ROE to common stockholders, subtract the amount of stockholders' equity from preferred shareholders from the total amount of stockholders' equity. Otherwise, use total stockholders' equity in your equation to calculate the return on total equity.

Step 4

Calculate the ROE ratio. The ROE formula is the company's net income divided by stockholders' equity

Step 5

Interpret the results. A negative stockholders' equity results in a negative ROE, however. this answer does not necessarily mean bad news for the company. New companies making large investments in infrastructure and marketing might experience a negative ROE. The challenge comes in considering a company's other characteristics, to determine whether it has the future capability to return a positive ROE.

Warnings

  • Negative shareholders' equity usually stems from negative retained earnings. Retained earnings represents the cumulative amount of earnings a company has had since inception. The loss gets carried froward each year as a paper record for accounting purposes. While this is acceptable for new companies, established companies with negative retained earnings could have severe problems. Additionally, negative stockholders' equity could result from large amounts of new debt, such as that from a leveraged buyout, or large reductions in the value of intangible assets, such as patents or trademarks, or dramatic losses in the value of currency positions.

Video of the Day

Brought to you by

References

About the Author

Cynthia Gaffney started writing in 2007 and has penned tax and finance articles for several different websites. She brings more than 20 years of experience in corporate finance and business ownership. Gaffney holds a Bachelor of Science in finance and business economics from the University of Southern California.

Photo Credits

  • Comstock Images/Comstock/Getty Images
Cite this Article | raiffeisen-cards.ru A tool to create a citation to reference this article Cite this Article

Related pages


credit card chargeback time framewhat is bid and ask in forexmedicaid cover invisalignreversal tubal ligation costnotice of tenancy terminationwhat does exempt mean on w-4donate used books nychow to claim lottery anonymouslydmv ca gov release of liabilitydcf florida medicaidatm card expiry dateclosing date extension addendumhow to calculate earning per shareroot canal average costcar loan with cosignerwhat does kd mean on credit reportcredit score bracketsthe balance in the prepaid rent accountusps lost receipt trackingdividend reinvestment formulajoint ira rothoil mineral rights calculatortransfer food stamps to another countywhat is oasdi deductionpresent value dividendwhere's my refund telephone numberwashington mutual bank routing numberirs 8863 instructionsw2 form for employee to fill outreceivables turnover ratio analysiswhen can a mortgage company foreclosehead of household vs filing jointlyoasdi tax calculatorfloat adjusted market capgrfa section 8pg&e bill onlineform 4684aira withdrawals after 59 1 2what is the deadline for employers to send out w2do you get withholding tax backannuity payout optionsloans for 16 year oldswhat are dividends in arrearsplpd coverageclaim lottery anonymouslypawn shop loan definitionmeaning of maturity value in insurancescrap sterling silver pricescoupons mailedreload netspend card with credit cardcash a cheque meaningdo i need gap insurance on my new carwhat happens if you leave a bank account overdrawnsample letter of financial hardshipcanceling a real estate contracthow to get a replacement acls cardhow do i work out pro rata salaryunion dues on tax returnlloyds lost credit cardaffidavit of lost check samplew2 request radioshack comrepo laws in illinoisfiling two w2 formswithholding tax rates by country for foreign stock dividendsletter of recommendation for a highschool student for a scholarshipw4 form vs w2how to calculate vacancy lossis there child support with joint custodyshoplifting statute of limitationsbond computations straight line amortizationhow to get out of repaying student loanswindstream pay bill phone numbercredit card approval with 620 scorehow to work out your gross pay from net