Equity value is the value of a company available to owners or shareholders and is a vital measure of business performance.
Simply put, equity value measures the balance sheet of a business, accounting for all of its current stocks, debt and cash, as well as other long-term liabilities, such asthe value of stock options, convertible securities, and other potential assets or liabilities. The measure gives an indication of potential future value and growth potential.
For a business to be viable, equity value should be positive. However, if equity value is negative, its an indication that theres no value in the enterprise for owners and shareholders.
Shareholders ofAnglo American (LSE: AAL),Gulf Keystone Petroleum (LSE: GKP) andStandard Chartered (LSE: STAN) couldbe faced with this prospect as debts and long-term liabilities for these companies are now starting to exceed assets.
A commodity casualty
Over the past five years, more than 90% of Anglo Americans equity value has disappeared as the companys shares have slumped to an all-time low. And now the companys total net debt pile of around $15bn is nearly three times more than Anglos market cap a big red flag.
Nevertheless, Anglos management has already come out with a debt reduction plan, which will see the group shed two-thirds of its operations.
But as commodity prices remain volatile,it remains to be seen if this will be enough for Anglo to repair its balance sheet and return to growth. In fact, analysts at Citigroup believe that theres now a 25% chance that Anglos equity could be worthless, an extremely worryingstatistic for investors.
Waiting for payment
The oil price slump has hit Gulf Keystone harder than most small oil producers. The companys towering debt pile is sucking up all of the companys cash flow in interest payments. According to City analysts, if the price of oil doesnt stage a recovery in the second half of the year, Gulf Keystone will struggle to make itsOctober interest payment.
It has been rumoured for some time that Gulf Keystones bondholders have beenincreasing their pressure on the company to do something about its finances. According to a report from Bloomberg, the companys bondholders have already startedpreparing for a potential debt restructuring this year. Only time will tell if this is really the case.
Still, its clear that Gulf Keystone is running out of cash and is now at the mercy of the oil markets.
Oil marketexposure
Standard Chartered is also at the mercy of the oil markets as its suffering from what CEO Bill Winters has called alegacy of growth over risk discipline. His policy of quantity over quality is now coming back to haunt the bank. A spike in losses on legacy loans is eating away at Standards capital reserves.
As Ive written before, City analysts have estimated that around 20% of Standards total loan book is linked, directly and indirectly, to the commodity market approximately $61bn in dollar terms, roughly 140% of the banks tangible net worth. Of this $61bn, around $25bn of these loans are to the oil and gas sector.
A sudden spike in loan losses could wipe out Standards equity value overnight.
The bottom line
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.