What’s the question?
Book equity is what remains after a company’s liabilities are subtracted from its assets. When the figure is below zero, the balance sheet states that the company owes more than it owns. That is the textbook definition of accounting insolvency, and it breaks two widely used screening ratios: price-to-book gains a negative denominator, and return on equity flips sign while the business is still earning money.
Twenty-nine S&P 500 companies carrying a current annual balance sheet report negative book equity. Either the index holds a pocket of insolvent companies, or book equity is measuring something other than solvency. Six per cent of a sample is too large to handle by accident.
The approach
The test sets one accounting figure against two cash figures from the same fiscal year.
- Universe: the current S&P 500 roster, retrieved through the index endpoint and carried by entity id rather than by ticker, so each company is followed by its own identity.
- For each company, take the most recent annual balance sheet whose fiscal year ends on 1 January 2025 or later. That window holds 474 of the 504 members, and those 474 form the sample.
- Flag every company whose reported total equity is below zero.
- Against each flagged company set net income and free cash flow, defined as operating cash flow minus capital expenditure, for that same fiscal year.
Step 4 is the actual test: insolvency has a cash meaning as well as an accounting one, and a company that cannot meet its obligations reveals it in the cash flow statement.
Code
import pandas as pd
import xfinlink as xfl
xfl.set_api_key("YOUR_API_KEY") # free at https://xfinlink.com/signup
FIELDS = ["revenue", "net_income", "total_equity", "retained_earnings",
"treasury_stock", "total_assets", "operating_cash_flow",
"capital_expenditures", "gics_sector"]
roster = xfl.index("sp500")
ids = sorted(int(i) for i in roster["entity_id"].dropna().unique())
f = pd.concat([xfl.fundamentals(entity_id=ids[i:i + 50], period_type="annual",
fields=FIELDS, start="2024-01-01",
end="2026-09-10", max_rows=50000)
for i in range(0, len(ids), 50)], ignore_index=True)
# One row per company: the most recent annual balance sheet, fiscal 2025 or later
bs = f[f["total_equity"].notna()].sort_values("period_end")
latest = bs.groupby("entity_id").tail(1)
s = latest[latest["period_end"] >= "2025-01-01"].copy()
s["fcf"] = s["operating_cash_flow"] - s["capital_expenditures"]
neg = s[s["total_equity"] < 0].sort_values("total_equity")
print(f"negative book equity: {len(neg)} of {len(s)}")
print(f"profitable: {(neg['net_income'] > 0).sum()} "
f"free cash flow positive: {(neg['fcf'] > 0).sum()}")
print(f"combined equity {neg['total_equity'].sum():,.0f} "
f"combined free cash flow {neg['fcf'].sum():,.0f}")Full script with formatting and visualisation: negative-book-equity-sp500-python.py
Output
current S&P 500 roster: 504 members
members with an annual balance sheet for fiscal 2025 or later: 474
of those, reporting negative book equity: 29 (6.1%)
sector FY end revenue equity net inc FCF
PM Consumer Staples 2025-12-31 40,648 -9,994 11,348 10,664
LOW Consumer Discretionary 2026-01-30 86,286 -9,917 6,654 7,651
TDG Industrials 2025-09-30 8,831 -9,686 2,074 1,816
SBUX Consumer Discretionary 2025-09-28 37,184 -8,097 1,856 2,442
YUM Consumer Discretionary 2025-12-31 8,214 -7,325 1,559 1,639
HCA Health Care 2025-12-31 75,600 -6,027 6,784 7,692
BKNG Consumer Discretionary 2025-12-31 26,917 -5,578 5,404 9,087
OTIS Industrials 2025-12-31 14,431 -5,392 1,384 1,444
HLT Consumer Discretionary 2025-12-31 12,039 -5,388 1,457 2,028
SBAC Real Estate 2025-12-31 2,815 -4,854 1,054 1
DPZ Consumer Discretionary 2025-12-28 4,940 -3,901 602 672
MAR Consumer Discretionary 2025-12-31 26,186 -3,771 2,601 2,608
MO Consumer Staples 2025-12-31 23,279 -3,502 6,947 9,074
AZO Consumer Discretionary 2025-08-30 18,939 -3,414 2,498 1,790
ABBV Health Care 2025-12-31 61,160 -3,270 4,226 17,816
CAH Health Care 2026-06-30 254,248 -2,883 1,714 4,525
MSCI Financials 2025-12-31 3,134 -2,655 1,202 1,549
DELL Information Technology 2026-01-30 113,538 -2,470 5,936 8,552
MCK Health Care 2026-03-31 403,430 -2,172 4,762 5,719
VRSN Information Technology 2025-12-31 1,657 -2,154 826 1,068
MCD Consumer Discretionary 2025-12-31 26,885 -1,791 8,563 10,197
FICO Information Technology 2025-09-30 1,991 -1,746 652 770
IRM Real Estate 2025-12-31 6,902 -981 152 -932
ORLY Consumer Discretionary 2025-12-31 17,782 -763 2,538 1,593
DVA Health Care 2025-12-31 13,643 -651 747 1,311
HPQ Information Technology 2025-10-31 55,295 -346 2,529 2,800
WYNN Consumer Discretionary 2025-12-31 7,138 -275 327 692
MAS Industrials 2025-12-31 7,562 -185 810 866
MTD Health Care 2025-12-31 4,026 -24 869 849
combined book equity -109,212
combined net income 88,076
combined free cash flow 115,983
profitable in that fiscal year: 29 of 29
free cash flow positive: 28 of 29
median return on equity as reported: -73%
sectors: Consumer Discretionary 11, Health Care 6, Information Technology 4, Industrials 3, Consumer Staples 2, Real Estate 2, Financials 1
MCD retained earnings 70,282 treasury stock 79,316 equity -1,791
LOW retained earnings -10,839 equity -9,917What this tells us
All 29 companies earned a profit in the fiscal year their balance sheets cover, and 28 produced positive free cash flow. The group generated 115,983 million dollars of free cash flow against a combined book deficit of 109,212 million, so one year of cash generation exceeds the entire accumulated shortfall in book value. No distressed cohort produces that pattern.
Shareholder payouts are the mechanism, and the buyback half of them reaches the balance sheet by two routes. McDonald’s has retained 70,282 million of past profit and spent 79,316 million buying its own shares, which sits on the balance sheet as treasury stock and is subtracted from equity; the excess of the second figure over the first is most of the reason its equity reads -1,791 million. Lowe’s cancels the shares it repurchases instead of holding them, so the cost is charged against retained earnings, which stand at -10,839 million after years of buybacks larger than reported profit. Under either route the deficit records cash handed to shareholders rather than losses.
The sector pattern follows from the mechanism. Eleven of the 29 sit in Consumer Discretionary, where franchised restaurants and specialty retailers pair modest asset bases with steady cash generation, the profile that sustains years of large payouts. Two names read differently: Iron Mountain is the only one with negative free cash flow, at -932 million, and SBA Communications converted 2,815 million of revenue into 1 million of it. Both are real estate companies whose construction spending absorbs nearly all of the operating cash they produce, so their deficits have a different history behind them.
Return on equity computed on these balance sheets has a median of -73 per cent, and McDonald’s reports 8,563 million of net income on -1,791 million of equity, which is -478 per cent. The ratio stays valid arithmetically and empty economically.
So what?
Treat the sign of book equity as an accounting record of past distributions, not as a solvency signal. Route these companies away from book-based metrics: rank them on enterprise value against operating income or free cash flow, where the denominator survives a buyback, and judge leverage by net debt against cash flow rather than against a book figure driven through zero by repurchases.
Then check what an existing screen does with them. A price-to-book sort that drops negative denominators silently removes 6 per cent of the sample, McDonald’s and Booking Holdings included, and the names it removes are companies that returned a lot of cash rather than companies that are expensive. A return-on-equity filter behaves worse, because it keeps them and ranks them at the bottom while they earn 88,076 million between them.
Distress, where it exists, shows up in the cash columns instead. The screen worth running is negative book equity together with negative free cash flow, which flags one company here rather than 29, and that one is capital-intensive real estate rather than a failing business.