we cannot compare ROE with risk-free interest rate as it is negative. Maybe it is associated with financial distress

I feel there is no problem if net income is more than equity. If u have used book value of equity, this will happen very happen as book value remains very small even though companies increase their income over the years. If you have used market value t hen it is indeed incredible to attain such high return. In any case you can compute the ROE for some near competitors and see is it general trend or not

When ROE has a negative value means the firm is of financial distress since ROE is a profitability indicator because ROE comprises aspects of performance. ROE of more than 15% indicates good performance.

This negativity of result indicates that organization have faced loss in current year. and if we see the magnitude of value which is too high, the reason might be that organization was facing losses for long, as its equity capital decreases with every loss incurred.

ROE measures the ratio of the Return for the year as a ratio of (or times of) the Equity capital (always book value). Since the return for the year is negative (loss) the ratio is negative and it so happens this year that the return (-ve) value is less than the equity and therefore you get the ratio less than one. For eg. this year the loss is USD 500 and the equity is USD 600, the ratio would be -500/600 = - 0.866, which is less than one and is negative. Calculating RoE over the Market capitalisation is not correct in the sense, the MV is subject to changes for various reasons and was not considered for selecting the project initially.

Sorry the ratio of -500/600 is -0.833

DuPont formula for ROE defined as strategic profit model is the product of NET MARGIN, ASSET TURNOVER, and FINANCIAL LEVERAGE is given by;

ROE = Net income / sales x Sales / Total Assets x Total Assets / Shareholder Equity

Increase in the net margin implies every sale increases net income and increases ROE. Decrease in net margin may push the performance to negative sales or can negative net income minimizing ROE to -1.

Asset turnover is sales per unit total assets. That is the amount of sales generated per unit asset has a toll on ROE. Decrease asset turnover presupposes revenue generated do not match the cost of total asset used to manufacture the products. Keeping total assets constant, the asset turnover ratio can have a minimum value of -1 suggesting total loss in performance.

Financial leverage depicts the strength of organizational finance as to whether it is skew towards shareholders equity or debt. We can talk about decrease in ROE if return on assets (ROA) does not exceed interest rate on debt. Under this circumstances -1 may imply financial bankruptcy.

Just for being more clear: I perfomed the calculation and results are that two companies have ROE (numerator net income) less than -1, i.e. : Thyssenkrupp-1,031 and Essar steel -1,261. Both results were in 2012.

There is no reason why we pick the benchmark is 1 for ROE. However this ratio is suggested that the higher this ratio is, the better result for investors. Im addition, risk free interest rate is used to compare with ROE, if ROE is higher than risk free interest rate, it will be good indicator to invest.

I agree with Hang Dang. There is no reason to take -1 or 1 as benchmarks for ROE.

If we should need a benchmark for ROE, we can consider an average sectoral ROE for the considered period, or a rate of required return, taking into account the risks (that should be the risk free rate + a risk premium).

If Thyssenkrupp has a ROE of (-1,031) and Essar steel one of (-1,261), I can say that both companies recorded losses, but the second one recorded a higher loss. In this case, I can say that Thyssenkrupp performed better than Essar steel in 2012...

Some problems can appear in interpreting ROE when the value of equity is negative, but this is another story.

mean of ROE was -0,060, median was -,011

Indeed, it is strange. Maybe a very poor year? Or, can be possible to be something related to the source of information?

it, 2012, was quite a poor year for steel industry. Destocking of inventories took place again. The source of information are the websites from the companies. They are listed as top 50 steel producers in worldsteel.

In this case, I think that an ROE higher than the average annual ROE (for 2012) can be a good benchmark...

Also, I think that you can consider for interpretation a multi-annual average for ROE.

I must be missing something here. Please excuse me if I have misread the question. When ROE is negative, it simply means to me the company has lost money during the period chosen for computing ROE.. This does not necessarily mean that the company is going bankrupt. It is possible for a firm to have negative income but positive cash flows (because of inclusion of depreciation and amortization when computing cash flows). If ROE is negative because equity is negative, then we are dealing with a bankrupt firm.

@Tarun

I totally agree with the interpretation for negative ROE.

One observation: there are some countries where you can survive for years with a negative equity, even from a financial perspective it is bankrupt.

See also the discussions here:

https://www.researchgate.net/post/How_long_can_a_company_survive_with_negative_equity_and_how_long_is_this_state_permitted_in_the_USA

it is another situation in AK STEEL holding: book equity was negative, income was negative so ROE was positive

I think that for all the companies with a negative book equity, ROE should have no economic or financial meaning. It should be interpreted as "effect resulted from a negative effort" - here this negative effort seems to be illogical from a financial point of view.

I think these records should be excluded from the database.

I agree with you--almost 100%. However, I would not recommend that, instead of removing these cases from the database, they should be reported as "not meaningful." For purposes of research, these cases might add some valuable insight to analyses in some special research situations.

Indeed, you are right.

@ Victor

"there are some countries where you can survive for years with a negative equity, even from a financial perspective it is bankrupt"

Yes, such country is Serbia, you can take a look at these findings: http://www.researchgate.net/publication/236006433_Capital_efficiency_analysis_of_Serbian_companies?ev=prf_pub

Article Capital efficiency analysis of Serbian companies

Have I missed something here? Is the question about ROE of less than 1 or less than 0? Whatever the case, ROE depends on one hand on profitability of sales and on the other hand on how well assets are utilized to generate those sales. This means it's possible to generate negative returns meaning that for each unit of amount invested, the investor is losing some proportion. However, this does not mean closing business. The business may survive years of negative returns as survival depends on ability to generate cash. Returns are much of accounting profits subject to several accounting bases which in themselves do not translate into cash generation.

You are right. I still do not what the intent of the original question. The formula for ROE is Earnings available to common stockholders divided by common equity. It is a percentage. So if one gets an answer of 1, it simply means the ROE is 100%. If it is less than 1, but greater than 0, it simply means the ROE is any where between greater than 0 but less than 100%. If it is less than 0, it simply means the ROE is negative. We need more information to conclude regarding the implication of this result on the firm. [when applied to Du Pont formula, ROE can provide further insights about a firm's financial health.]

The question is not absolutely clear. But you can obtain Roe greater than 1, lower than 1 and lower than zero as well (as explained before, there are firms with negative equity).

in 2013 Thyssenkrupp sold one mill in Alabama (USA) and ROE (numerator net imcome) is between (-1;0), i.e. the company incurred loss

Additionally to your positioning, you can obtain a negative ROE when firms have Loss (negative income)/positive equity and when they have positive income/negative equity..

Particularly, I would exclude firms with negative equity in my database, because abnormal returns (for example) do not have an obvious economic interpretation in that sense..

Do not invest there.

is there any economic interpretation when you count positive ROE=negative income (i.e. loss)/negative equity? Also Algoma is in similiar situation

I think this kind of result does not have any economic meaning. As long as the equity is negative (in other words, the effort should be negative???!!!), ROE has no meaning.

Of course, earnings can be profit or loss, but it does not change the situation.

ROE has meaning for shareholders/equityholders that is how succesfully their capital is employed.

I agree. But what can be the sense if 'their capital' is negative? From an economical point of view, can we imagine a negative invested capital?

This is why ROE should not be calculated if equity < 0.

ok, I approve. maybe some regulations and limits should be, e.g. the minimum for equity of the total capital.

I will have to assume that you are asking "what are the implications/reasons for ROE

Accumulated losses for years :)

market value and stock price are quite interesting story. Even they are quite low regarding other companies in steel industry, they have not declined lower than 1 USD.

Ooooh, steel companies...You mean "companies" who finance their losses with long term debt...now the -100% roe makes a lot of sense! very little value here. It would be interesting to look in a panel data format at the relationship between a change in ROE (or ROI) and ex-post returns for all world steel companies... though i don't much faith in chinese companies' fundamentals and their unique interpretation of GAAP.

Some of them sold inefficient and unprofitable mills in order to decrease their debt and increase liquidity