Frequently Asked Questions
General question
Students have often questioned the interpretation of a negative Return on Equity (Net income/BV of equity) which usually happens in the following two situations:
1. When the net income is negative, which may imply that the company is currently incurring some losses and should be interpreted based on the company’s financial situation.
2. When the Book value of equity is negative, and hence despite having a positive net income, the ROE is going to be negative due to a negative denominator. In this instance, a higher ROE (even though it is negative) may imply that the company is performing well in terms of profit generation.
In both instances, students should look for the details behind this ratio and justify their interpretation.