Post 14-17 discussed Boeing having negative equity. Was there really a time with negative equity?
I post two cases. Please correct me if I'm wrong.
I have 500.000 $ own money (=equity) and decide to sell skiing equipment in a oasis in the Sahara. My showroom costs me 480.000$. I have 20.000 $ left, but decide to order 50.000$ skiing equipment. I get the stuff delivered. Unfortunately no bank is convinced of my business case and willing to give me credit.
I'm unable to pay the loan. I have to declare bancruptcy even though I still have 500.000$ equity. It's a cash flow problem.
I started with 500.000 $ equity and have a successfull business running for some time. I manufacture products with good demand and profit range.
Thanks to retained earnings I already have 700.000 $ equity. I have a two million $ credit from the bank. The 2.7 million $ "equity + liability" are matched on the asset side with 600.000 plant + equipment, 1 million for material (stocks in trade) and 1.1 million cash. It so happens that I sell 800.000 $ material to a guy who goes bancrupt. I can't recover the money. I still have 1.1 million cash on my account, but as I have to write off 800.000 $ my equity goes negative. I have to declare bancruptcy even though I don't have a cash flow problem.
Why would case 2 declare bankruptcy? If that was a requirement, Amazon, Google, and most small tech companies would have failed.
Amazon Annual Report 2018, p.39:
Balance sheet 162,648 million $
of which equity 43,549 million $https://ir.aboutamazon.com/static-files ... 5dc9d8b5ec
Alphabet Fiscal year 2018 report:
Balance sheet 232,792 million $
total stockholder's equity: 177,628 million $
total liabilities 55,164 million $https://ir.aboutamazon.com/static-files ... 5dc9d8b5ec
I don't remember to have ever seen a balance sheet with such high proportion of equity as Alphabet's.
What made you think they have no equity?
However you do have a point:
"Shareholder equity can be either negative or positive. If positive, the company has enough assets to cover its liabilities.
If negative, the company's liabilities exceed its assets; if prolonged, this is considered balance sheet insolvency. "https://www.investopedia.com/terms/e/equity.asp
I was surprised to learn that Rolls Royce has negative equity. I was always under the impression that this is illegal.
It also doesn't make sense. I may lend money to somebody who has some own skin in the game which is getting lost first. I wouldn't continue to lend him money if he has no own money to loose. What does "prolonged" mean?
Later in the above link under "components of shareholder equity":
"Treasury shares or stock (not to be confused with U.S.Treasury bills) represent stock that the company has bought back from existing shareholders.
Companies may do a repurchase when management cannot deploy all the available equity capital in ways that might deliver the best returns. Shares bought back by companies become treasury shares, and their dollar value is noted in an account called treasury stock, a contra account to the accounts of investor capital and retained earnings. Companies can reissue treasury shares back to stockholders when companies need to raise money."
Coming back to Boeing (Q1, not Q2):
While equity is a ridiculously low 232 million $, they have 54,630 million $ in treasury stocks.
p.5: http://s2.q4cdn.com/661678649/files/doc ... 9-10-Q.PDF
So I was wrong when I claimed in some other topic that Boeing is close to bankruptcy.