What is a satisfactory answer to this: "If shareholders equity is negative, why is the share price trading positive? Why is there still value there?" (Has come up in a couple of RX interviews)
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Balance sheet doesn't capture future value of cash flows.
This is correct, but I'd expand on it to say that the balance sheet isn't necessarily marked to fair value either (it's book value); assets could be undervalued, particularly if there is proprietary and patented assets.
It may be easier to use a hypothetical example. You found Company ABC and you guys are developing cutting-edge technology. It's expensive as hell to develop, and you guys are incurring enormous R&D expenses and haven't recognized revenue yet. Your balance sheet has negative equity, as you keep incurring losses. Your stock may be a penny stock or it might be highly valued, depending on how investors view the probability of success for your cutting-edge product. If there isn't much optimism for this tech that is "right around the corner," then it's more likely to be a penny stock, but if it's widely anticipated to be a game changer, you might be trading quite high. That make sense?
Thanks guys...wish we could develop like a free repository of these sort of random technical questions...
in practice sometimes especially with retail folks, they will just refuse selling (thus positive price of shares) because they hope that the company will be fixed even after having it's book value of equity all wiped out. .... until the chap11 kicks in and the judge tells them to f.off. Rxing can also have them diluted to oblivion before chap11. contrary to popular belief, the market isn't always right.
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