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Consider the technology company Snap Inc (NYSE: SNAP). When you look at its balance sheet we see that Ret. Earn.(Accum. Deficit) is (7,778) Million.

Yet it has a positive shareholder equity value. Total Equity is 2,199 Million. As a student who is still new to the world of financial statements. How exactly is this possible?

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  • 3
    Well, it owns Snapchat. How many million dollars do you think someone would pay to buy Snapchat? Nov 2, 2020 at 11:52
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    Note that your house, say, has a very high value, but no income at all. It's totally normal that something has high value / no income.
    – Fattie
    Nov 2, 2020 at 16:08
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    If I have an axe and I chop down trees and make desirable chairs but never sell a chair then my equity accounts for the value of my axe ($50-$100) and chairs (no. of chairs * market rate for a chair of the given build quality) even though I've never sold either one.
    – MonkeyZeus
    Nov 2, 2020 at 18:39
  • @Fattie I understand that part, but how is equity INCREASING?
    – AlanSTACK
    Nov 5, 2020 at 1:50
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    @AlanSTACK it's completely normal that your house could be sold for $1m today, but five years from now it might be worth $2m. The equity has doubled!
    – Fattie
    Nov 5, 2020 at 2:03

1 Answer 1

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While your assessment is fundamentally correct, you are missing one simple thing: The question is not whether it ever had an income, but what the value is of the assets held by the company.

Example 1: Every year you spend $10k more than you earn. Are you bankrupt? Well, you own a couple of hectare of land that you can sell for millions. Have fun spending your money!

Example 2: I give you an account with $100k. You take out $1000 per year for 5 years. You still have positive equity despite never making any money.

In case of Snap Inc - same basic accounting principle. Equity is assets - liabilities. So, Snap Inc still has equity by simply having more assets than liabilities. One way is by doing a large IPO and taking in a TON of investor money that still is not used up.

Let's have a look at the stock chart. This is a nice income statement, but it is NOT A BALANCE SHEET. If you look at the balance sheet you see it has a TON of equity, TON of invested capital, heck, and still a ton of working capital. Here are the hectares of land (i.e. the asset worth a LOT) and the accumulated debt is not large enough to completely offset those.

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  • I understand your point, but how is equity INCREASING? Even after IPO, how exactly does the company have INCREASING equity despite running ever-larger annual deficits?
    – AlanSTACK
    Nov 5, 2020 at 1:51
  • Alan, they own a lot of stock in other companies, that could be going up tremendously.
    – Fattie
    Nov 5, 2020 at 2:06
  • Actually given how the stock market was the last months, it DID go up.
    – TomTom
    Nov 5, 2020 at 7:43
  • @AlanSTACK irrational exuberance.
    – RonJohn
    Dec 16, 2022 at 1:02

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