No. of Recommendations: 1
Dear y'all,

Just to add to Wiggy's note.

It is possible for a company to earn money yet have a negative shareholder's equity. For example, if a company issues enough debt and uses it to repurchase shares, this could happen. US Tobacco (NYSE:UST) still has a positive book value, but intends to continue to "leverage up" and repurchase shares, and so quite possibly it may drop negative.

In a situation where a company can borrow money cheaply and has steady and predictable earnings, it may make sense to do this. (I must admit, it makes me a bit uncomfortable though). Equity has a high opportunity cost and debt is a tax shield, so sometimes leveraging up makes sense. KKR has put together some successful deals with highly leveraged structures, then proceeded to pay off the debt successfully.

Negative retained earnings leading to negative shareholder's equity though sounds bad...

Lleweilun Smith
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