Extreme cases of Retained-Earnings to Total-Assets Ratio

Question

Following are some companies with negative Retained Earnings to Total Assets Ratios.

      ticker                       industry retained_earnings total_assets      RE_TA
   1:   STCN Integrated Freight & Logistics        -7494.1020   147.299000 -50.876802
   2:   MACK                  Biotechnology         -546.2240    14.639000 -37.312931
   3:   VIAV        Communication Equipment       -69529.9000  1878.000000 -37.023376
   4:   OMEX    Specialty Business Services         -283.3211     8.967281 -31.594982
   5:   REFR          Electronic Components         -120.3155     3.859915 -31.170499

And following are some companies with very high Retained Earnings to Total Assets Ratios.

      ticker                       industry retained_earnings total_assets      RE_TA
   1:    HHS           Advertising Agencies          814.4390   111.114000   7.329760
   2:    WAT         Diagnostics & Research         7960.6630  3041.269000   2.617546
   3:   LOPE  Education & Training Services         1913.1300   918.386000   2.083144
   4:   CHKP         Software - Application        11700.3000  5725.800000   2.043435
   5:     WW              Personal Services         2675.7670  1419.426000   1.885105

Questions -

For the first set, how can retained earnings go so much negative while the company still has some assets. Won't these companies should already be bankrupt?
For the second set, how can a company have retained earnings which is multiple times its assets? What the management is doing so that retained earnings are increasing and total assets are not increasing?

Both of the above scenarios are difficult to understand. Can someone explain how this is even possible?

Here is the inference of this ratio from the website but I am not sure how to interpret these extreme cases - https://accountinginside.com/retained-earnings-to-total-asset/

If the ratio = 0: It means the company relies 100% on debt and shareholder’s capital, they are not yet making any profit and be able to reinvest.

If the ratio = 1: It means the company relies 100% on retained earnings to operate and invest. It is almost impossible in real life. But the cases I showed above have this ratio of more than 1.

If the ratio >0 but <1: It means partial assets are funded by retained earnings while the rest are funded by debt or share capital. It depends on the percentage of ratio.

Thanks, Pavel. I see retained earnings as the accumulated money I have collected in banks for rainy days or to expand my business. It is practically possible to have multiple times retained earnings to my assets. But how it is possible to have negative retained earnings that is 50 times more than my assets as in the case of "STCN" stock above. — Saurabh, Jul 27 '22 at 12:07
"retained earnings [i]s the accumulated money I have collected in banks". No, no, no. Retained earnings is not a pile of cash in a bank somewhere. — nbbo2, Jul 28 '22 at 18:59
As per Investopedia, Retained earnings (RE) is the amount of net income left over for the business after it has paid out dividends to its shareholders. I think I wrongly assumed that most of it are cash. What other forms can retained earnings be "retained"? — Saurabh, Jul 29 '22 at 07:27
Remember, Assets = Liabilities + Equity (of which RE are a constituent). There is no rule for where the earnings must be deployed. It can be stored in cash until a worthy project is found for example. A less common use of these funds is stock buy-backs as is the case for HHS. — Lsvob, Jul 29 '22 at 08:30

score 3 · Accepted Answer · answered Jul 28 '22 at 13:54

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For these types of issues, it's often a good idea to dive into the balance sheet and see what kind of accounting magic is at hand.

An example for each of your datasets:

STCN: Almost all the negative retained earnings are compensated by Additional Paid-In Capital/Capital Surplus which can be interpreted in various ways.

HHS: The extreme amount of retained earnings is more than compensated by the aggressive share buy-back schemes that have been implemented as shown by the value of Treasury Stock

answered Jul 28 '22 at 13:54

Lsvob

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Thanks, Lsvob. Is it safe to say that true retained_earnings are equal to retained_earnings + preferred_stock + paid_in_capital + capital_surplus + currency_adjustments - treasury_stock? Do you have a reference link that shows the various ways we can interpret paid_in_capital or capital_surplus? – Saurabh Jul 29 '22 at 07:29
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My pleasure, Saurabh. I think adding all these elements might bring you closer to the entire value of equity than you might want. If you are trying to measure the level of self-reliance of a company, there are quite a few different ways you can gauge it. Would you mind telling me the end goal of your project so that I can try to give an example? Regarding the lines of the balance sheet, the hyperlinks which will direct you to investopedia can give you an idea. You can also see the balance sheets of the companies by clicking on the tickers in my answer – Lsvob Jul 29 '22 at 08:26
My goal is to find companies that are not self-reliant and are at high risk of bankruptcy. Retained-earnings to total-tangible-assets ratio usually give a good idea, but companies usually use financial engineering to boost retained earnings and hide their financial weaknesses. – Saurabh Jul 29 '22 at 10:28

Extreme cases of Retained-Earnings to Total-Assets Ratio

1 Answers1