If a company (MSFT) has negative retained earnings for two years. Is that a bad sign to invest in the company.

Answer 1

A good question. Unfortunately, I do not know the answer. The reason the retained earnings are negative is because of a special dividend in 2005 and stock buy back in 2006. The special dividend certainly was not a reason to not invest in the company. The stock buy back I do have a problem with. To me it seems a waste of company assets. However, I might be in the minority in that opinion. Wall Street in general seems to favor stock buy backs. Their reasoning is that it increases the earnings per share.

However, many companies tend to buy back their shares to support their inflated stock price. MSFT in my opinion tends to fall into that category. Oracle is/was another. That company threw away billions buying back inflated shares and stock holders equity diminished greatly. Stock holders' equity in MSFT is not doing too well either.

Answer 2

If a company is losing money, that's a bad sign. Are they a brand new company just starting out or an established company that has fallen on hard times. A new company just starting out may need some time to get their sales up to the break even point.

Are you looking at net income/loss, or are you really looking at "retained earnings"? Retained earnings is the accumulated earnings over the life of the company. I would only look at the last year or two in deciding whether to invest, depending on the company and how dynamic the industry is.