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The Daily Technical #55: How does selling a building with a book value of $6 million for $10 million impact the three financial statements?

How to answer "Is it bad if a company has negative retained earnings?"

November 26, 2024

Good morning. Welcome to the 55th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Is it bad if a company has negative retained earnings?

Not necessarily. Retained earnings can turn negative if the company has generated more accounting losses than profits.

For example, this is often the case for startups and early-stage companies investing heavily to support future growth (e.g., high capex, sales & marketing expenses, R&D spend).

Another component of retained earnings is the payout of dividends and share repurchases, contributing to lower or even negative retained earnings. In these scenarios, the negative retained earnings mean the company has returned more capital to shareholders than taken in.

Common Mistakes

  1. Viewing negative retained earnings solely as a red flag. Instead, emphasize how this can be part of strategic growth investments or shareholder return plans, underlining the company's broader financial strategy.

  2. Focusing only on the loss aspect, ignoring earnings distribution. Always remember to include dividends and share repurchases as potential reasons for negative retained earnings.

TL;DR

  • Negative retained earnings results from companies generating more accounting losses than profits.

  • Strategic financial decisions can lead to negative retained earnings, such as investing in growth or shareholder dividends/share repurchases.

TODAY’S QUESTION
How does selling a building with a book value of $6 million for $10 million impact the three financial statements?

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