Asset Deficiency
You owe more than you have; or rather, your liabilities exceed your assets on your balance sheet. End of the world? Not necessarily. Mean you're going bankrupt? Getting delisted (if you're a public company)? Not necessarily.
Why? Because accounting laws don't always reflect market realities when counting your beans...or assets. That factory you bought for $100 million 10 years ago works just fine...and it should work another 20 years. But accounting laws required you to have depreciated it 90% by now so you carry that asset as being worth only $10 million.
Bottom line: Whenever you hear negative terms attributed to some potential crisis, you have to look into the market realities of your business and not solely trust accounting law as it can often lead those relying on it...astray.
Related or Semi-related Video
Finance: What is the Debt to Equity Rati...18 Views
Finance allah shmoop shmoop What is the debt to equity
ratio or duras It is named in insane asylums all
over the world Well it's a balance sheet computation that
tries very roughly to measure how efficient a company is
using its precious capital resource is the numerator comprises long
term liabilities on ly For most companies with debt the
amount of long term debt vastly outweighs the short term
So they ignore the short The denominator is the company's
shareholder's equity Easy You know that computation right ale and
think that's the capital invested in the business that's what
Isthe so what does it mean to have a high
durer Well if shmoop a loops llc a producer of
the most delicious cereal on the planet has four billion
dollars of debt And on lee fourteen dollars of equity
will you don't have to be a wall street genius
to get that that's bad right Tons of debt almost
no equity It means that loans comprise some ninety nine
percent of the company and well that it is essentially
owned by the bank and other creditors not by the
equity stake holders And you want steak Flip things around
Your cisco networks with a billion dollars of debt and
like fifty billion dollars of equity Well the shareholders clearly
owned this company The size of the equity dwarfs the
size of the debt Got it Bottom line High ratio
bad low ratio Good at least if you're one of
the owner investors But if you're a banker with a
hankering to own a cereal company well then today you 00:01:33.338 --> [endTime] might be able to just take one over girls
Up Next
What is Debt-to-EBITDA? Debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a ratio that calculates Debt to net earn...
What is the loan-to-value ratio? Loan us some of your time and watch this handy video.
What are Debt Service and Debt Service Ratio? Debt service is the amount of funds needed by a borrower to successfully cover interest and principal...