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 the company has a very low balance sheet total, this may indicate minimal business activity or an "empty shell" structure where the company is barely active in regular business operations.
While a low balance sheet in itself is not necessarily problematic, it does complicate the assessment of actual business operations and financial performance. It may also indicate insufficient resources to achieve corporate objectives or meet future obligations.
With a structurally low balance sheet size, it is advisable to critically evaluate the company's continuity. Smaller companies have an increased risk of bankruptcy(*).
(*) Source: Gupta et al. (2015). Forecasting bankruptcy for SMEs using hazard function: To what extent does size matter?. Review of Quantitative Finance and Accounting, 45(4), 845-869.
