Negative retained earnings

B

Bramo

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• Apr 19, 2008

• #1

Hi,

I found something that I don`t really understand. There is a company with high revenue growth rate (annual 16-20%) that paid dividens higher than its net income, therefore had negative retained earnings and D/E ratio is 1.4. Could any one explain me what is this strategy?

thanks

Bramo

 

G

grantx

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• Apr 19, 2008

• #2

Bramo,

Possibly from 'Reserves'?

Grant.

 

R

Rhody Trader

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• Apr 20, 2008

• #3

The dividends could have been to preferred shareholders. Oftentimes preferreds have a set dividend amount that the company must pay, somewhat like interest on a note.

Also, keep in mind that the earnings figure might include as expenses some non-cash items like depreciation. You might better off looking at cashflow than earnings in a case like this.

 

G

grantx

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• Apr 20, 2008

• #4

Bramo,

If these kind of issues interest you, I would strongly advise Principles of Corporate Finance by Brealey and Myres. It explains difficult concepts in understandble terms, the calcs are simple, and it is written with wit. A brilliant book.

Grant.

 

M

MrGecko

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• Apr 20, 2008

• #5

Brealey + Myres was required reading for the Corporate Finance courses at uni; it is very good indeed.

 

G

grantx

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• Apr 20, 2008

• #6

Mr Gecko.

Two great minds think alike. Now, where are they?

Grant.

 

B

Bramo

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• Apr 23, 2008

• #7

Thanks for your help. I`ll definitely read that book.

Bramo

 

I

ikicker

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• May 12, 2008

• #8

You can have a negative retained earnings when a company pays out dividends on expected future income. Companies do this when they believe their stock price is getting low as an internal strategy and it's kind of a shady ordeal, possibly could be an indicator of an expectation to get bought?? depends on how much.

I'm an accounting major BTW.

What company is this?

 

G

grantx

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• May 12, 2008

• #9

I'm an Ancient Philosophy major BTW.

I have a friend who was a Sergeant Major, BTW.

BTW Mr Gecko, what was your "major", BTW?

Grant.