A case of Negative net woth was making headlines recently in media when the company that operates the profitable Indigo Airlines reported a negative net worth. Inter Globe Aviation, which operates Indigo Airlines has remained profitable for around seven years and is now gearing up for an IPO to raise Rs. 3,200Cr. It may be making profit on a YoY basis, but on the B.S, its net worth has deteriorated significantly (Rs.-139.39 Cr) in the three months ended June 2015.
So, how important is this so called net worth, while taking an investment decision?
If you ask me this question, my answer would be that, I will not consider buying a stock whose debt is greater than shareholders equity. Companies that are having negative net worth will always find it difficult to obtain fresh financing or meet their liquidity needs.
The chances of Bankruptcy is one risk. High debt companies, according to most do not enjoy financial freedom and at times, if the situation worsens, it could push companies into making difficult choices. Highly indebted companies may be forced to sell profitable assets while keeping divisions that are not so profitable, why because they need money so urgently and there will be less takers for loss making businesses. Once they are done with it, then they may fail to develop new products or make fresh acquisitions, why because their lenders insist that the new planned spending would violate debt covenants.
So, should anyone consider buying these stocks? Personally, I will not recommend anyone, the only people who should consider negative-net-worth companies are professional investors and speculators. Investing in troubled companies is considered as a specialized art and for that one requires experience and good understanding of the target companies balance sheets and income statements.
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