Negative book value!!!????

S

sf427

New member
Joined
Dec 1, 2009
Messages
0
Reaction score
0
Just got a question wrong on schweser because I thought p/bv couldn’t be negative. Apparently it can be. Under what circumstances? I know that p/bv is good for valuation when eps is negative and p/e therefor meaningless…not confusing the two issues. when can p/bv be negative? Or is this another schweser answer key error?
 
That doesn’t make any sense. I can understand BV<1 (it happened to Goldman/GE in March) but negative? Wouldn’t that mean the company is insolvent?
 
I think that when a company’s P/BV is negative it is insolvent. I remember reading in one of the sessions that P/BV is useful in valuing insolvent companies. Could this be that case? Someone correct me if I’m wrong…
 
I think CzarHC is correct.
Book Value of the company is All its Assets minus All its Liabilities. When Liabilities of a Company exceed its Assets, then the Book Value becomes negative. Meaning all its Equity is gone. And if company does not arrange for new Equity, it will go insolvent.
So, yes, a company can have a negative Book Value. And chances are that company would go insolvent.
 
Its interesting and hard to comprehend but it is true, a company can have negative BV. Look at GM for example, they were trading for the longest time with a negative BV. A lot of “zombie banks” in Japan have negative BVs. It just means that they have sustained net income losses over time which has eaten completely into their OE, doesnt mean that the company is insolvent.
Another way, say you have a MASSIVE investment portfolio like an insurance company with assets all held as available for sale, say your assets/equity is 10x, if your portfolio goes down 10%, then your equity is wiped out through negative aoci.
Anyways, just wanted to share… I asked the same question a while back and studied it deep.
 
I_Passed_Level_1 Wrote:
——————————————————-
> why is this difficult to understand?
> assets-liabilities= potentially be a negative
> number
EASY BRO! We’re the youngins.
Balls to the wall.
 
You must log in or register to reply here.
Back
Top