n short, yes. Total stockholders’ equity is a company’s book value, and it seems odd that a company could have a negative book value. But when a firm accumulates significant losses, this could cause equity to drop below zero.
Here’s an example from Sears (numbers are in millions):
Sears’ Balance Sheet February 3, 2018
|TOTAL ASSETS||$ 7,262|
|Capital in excess of par value||9,063|
|Accumulated other comprehensive loss||(1,072)|
|TOTAL LIABILITIES AND DEFICIT||$ 7,262|
Sears’ had stockholders’ equity of negative $3.723 billion on February 3, 2018.
Note that the words “stockholders’ equity” don’t appear on Sears’ Balance Sheet; we refer to total stockholders’ equity as total deficit when it’s negative.
What makes stockholders’ equity negative?
Negative stockholders’ equity occurs when a company has lost a lot of money. When this happens, you will see an account called Accumulated Deficit on the Balance Sheet (Accumulated Deficit is what we call the Retained Earnings account when Retained Earnings is negative). When you see Accumulated Deficit, this means the company has incurred a lot of losses; for Sears, the Accumulated Deficit was $5.895 billion as of February 3, 2018.
Stockholders’ equity can also be decreased by Accumulated Other Comprehensive Losses, which are losses that bypass the Income Statement. One example is unrealized losses on available-for-sale debt investments. Sears had accumulated $1.072 billion in other comprehensive losses as of February 3, 2018.
Repurchases of the company’s own shares, known as treasury stock, also reduce stockholders’ equity. For Sears, the treasury stock account reduced stockholders’ equity by $5.82 billion. Many companies hold treasury stock and still have positive total stockholders’ equity, so the driving force behind negative stockholders’ equity is almost always a series of large losses.
What does negative stockholders’ equity imply?
Negative stockholders’ equity implies the company may be going bankrupt soon. Sears declared bankruptcy within one year of the Balanced Sheet displayed earlier; another example is Gymboree. The children’s apparel company had negative stockholders’ equity of $609 million (the amounts below are in thousands) on January 28, 2017, prior to its first bankruptcy:
Gymboree’s Balance Sheet January 28, 2017
|TOTAL ASSETS||$ 755,498|
|Accumulated other comprehensive loss||(8,341)|
|TOTAL LIABILITIES AND DEFICIT||$ 755,498|
Gymboree didn’t go bankrupt because it had negative equity; a company could theoretically stay in business for decades with negative equity. This is because a company can stay in business so long as it has cash. Negative stockholders’ equity means the company has been losing a lot of money, however, which typically coincides with running out of cash.
The good news for shareholders is that negative stockholders’ equity does not mean the shareholders owe the company money. Stock held by Sears’ shareholders can (and probably will) become worthless, but Sears’ creditors can’t come after the shareholders for more money just because the company had negative stockholders’ equity.