If the annual accounts show negative assets or negative liabilities, or if the balance sheet is unbalanced, this indicates an incorrect balance sheet presentation that does not comply with accounting principles.
Negative assets and liabilities are, by definition, impossible. An unbalanced balance sheet, where total assets do not perfectly equal total liabilities, violates the fundamental accounting principle that the balance sheet must always balance.
This incorrect balance sheet information makes a reliable assessment of the financial position impossible. As long as the balance sheet contains incorrect information or is unbalanced, no reliable statements can be made about the solvency, liquidity, or financial continuity of the company.
If a company's equity is negative, it means that the company's liabilities exceed its assets. This can be due to, among other things, carried forward losses or impairment losses.
This is a serious warning sign: negative equity indicates a weakened financial position. The board must assess whether the company can continue to meet its obligations in the short term (the so-called going concern assessment).
With negative equity, there is an increased risk of bankruptcy(*), as the company depends on creditor support for its continued existence.
(*) Source: results based on our own study into causes of bankruptcies.
