# Negative debt/equity ratio?



## jonathon (1 January 2012)

I'm trying to understand net debt/equity ratios. What does it mean when the debt/equity ratio is a negative figure like -15% 0r -118%  ?
Thanks


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## tech/a (2 January 2012)

jonathon said:


> I'm trying to understand net debt/equity ratios. What does it mean when the debt/equity ratio is a negative figure like -15% 0r -118%  ?
> Thanks




Your in debt
Higher figures are common in margined situations
Even housing


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## elbee (2 January 2012)

A negative debt/equity ratio would indicate negative equity.

e.g. a loan of 75K over an asset worth 100K means equity of 25K and debt/equity ratio of 3. If the value of the asset halves then equity becomes -25K (50-75) and debt/equity ratio becomes -3.


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## jonathon (2 January 2012)

elbee said:


> A negative debt/equity ratio would indicate negative equity.
> 
> e.g. a loan of 75K over an asset worth 100K means equity of 25K and debt/equity ratio of 3. If the value of the asset halves then equity becomes -25K (50-75) and debt/equity ratio becomes -3.




Thanks elbee - so as a percentage would that be -300%?


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## alocineel (2 January 2012)

jonathon said:


> Thanks elbee - so as a percentage would that be -300%?




As I understand it in regards to stocks, the lower the percentage, the less debt there is against the companys equity.

So the above would not be -300% but 150% - meaning that for the amount of equity in the company (50k) there is a debt charge of 1.5 times. i.e. 75/50= 150%

As far as I know there is no such thing in stocks as negative D/E - please correct me if Im wrong. Though that this was more an accounting concept??


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## tech/a (2 January 2012)

Hmmm just learnt something.

http://www.investopedia.com/terms/n/negativeequity.asp#axzz1iH1HqoyV


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## elbee (2 January 2012)

A company could have negative equity but would of course be insolvent.

If a company's total assets were worth 50K and it had external liabilities of 75K then shareholders' funds (or equity) would be minus 25K - and debt/equity ratio would be -3 or -300%.


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## alocineel (2 January 2012)

Found the below definition from the ASX site.
Also, Shareholder Equity is equal to the amount of money that has been raised by issuance of shares.
Still not sure how you get a negative D/E ratio?? Fully accept that you can have negative equity as per investopedia but not sure on how you get -ve total debt or -ve shareholder equity to make the below ratio negative?? Any smartees out there that can please explain a -ve D/E ratio to MR D.Shmuck 


debt equity ratio
Relationship between funds provided by borrowing and funds provided by shareholders. The debt/equity ratio shows to what extent a company is financed by debt (also called the gearing or leverage ratio). 

Debt/Equity ratio = (total debt / shareholder equity) x 100


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## elbee (3 January 2012)

alocineel said:


> Shareholder Equity is equal to the amount of money that has been raised by issuance of shares.




No. It is the amount of money raised by issuing shares plus/minus accumulated profits/losses. 



> not sure on how you get...... -ve shareholder equity to make the below ratio negative??




 Ask Alan Bond, Christopher Skase et al.


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## jonathon (3 January 2012)

elbee said:


> Ask Alan Bond, Christopher Skase et al.




It's just that many companies which are otherwise quite healthy seem to have negative debt/equity ratios:
Seymour Whyte   -74%
Breville  -18%
Flight Centre   -118%
Nick Scali       -55%


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## elbee (3 January 2012)

jonathon said:


> It's just that many companies which are otherwise quite healthy seem to have negative debt/equity ratios..




I suggest you re-check your source. Those figures do not agree with publicly available data.


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## jonathon (6 January 2012)

elbee said:


> I suggest you re-check your source. Those figures do not agree with publicly available data.




Yes, you're right elbee. My original question referred to _net debt/equity ratios_, but then I kept referring to _debt/equity ratios_, because I didn't know the difference, and so just confused the issue.

I have since found that a company with a negative _net debt equity ratio_ is very healthy, because it has little debt, unlike a company with a negative _debt/equity ratio_.

This is a definition I came across:

_ Net debt-to-equity ratio

(This calculation produces one of the most powerful ratios available when an investor wishes to avoid doomed stock)

It is calculated by taking total short-term and long-term debt financing employed, subtracting available cash and measuring this against the shareholders equity supporting that debt. Anything above a conservative level of gearing can put significant amounts of pressure on the business cash flow. Pressure which will likely be more pronounced for highly geared businesses or businesses in stress. As a guide, look carefully at businesses with Net Debt-to-Equity Ratios exceeding 50%.
_


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## skc (6 January 2012)

elbee said:


> A company could have negative equity but would of course be insolvent.




Not always.

Say a house's market value is $400k but has debt of $500k against it, it will be in negative equity.

However, the debt has interest rate of 3% yet rental yield is 5%, the property is still cashflow positive.

Provided that the debt isn't fall due or that convenent isn't breached (like LVR), it can remain a solvent situation.

Austar is an example where the balance sheet is showing negative net equity... I am not sure how that came about but as far as I know it is relatively solvent.


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## quadfin (7 January 2012)

Simple DEBT/EQUITY RATIO less than 100 is comfortable but higher indicates a highly geared company, aim for <80 or for the more conservative <50

Personally in analysis i scrap any company who does not meet this level.


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