Definition
Net Worth Erosion
Net worth erosion is the depletion of a company's shareholders' equity by accumulated losses, sometimes to the point of negative net worth.
Sustained losses eat into retained earnings and then into share capital, shrinking net worth. When accumulated losses exceed reserves and part of paid-up capital, the company's net worth turns negative, a sign of severe financial distress.
Under Indian law, substantial net-worth erosion can trigger reporting to regulators and, for sick companies, references under insolvency or revival frameworks. For banks, capital erosion below regulatory minimums invites prompt corrective action by the RBI.
Related terms
- Prompt Corrective Action (PCA)Prompt Corrective Action is the RBI framework that imposes restrictions on weak banks breaching thresholds for capital, asset quality or profitability.
- Going ConcernGoing concern is the accounting assumption that a company will continue operating for the foreseeable future, underpinning the valuation of its assets and liabilities.
- Retained EarningsRetained earnings are the cumulative profits a company has kept and reinvested rather than paid out as dividends, forming part of shareholders' equity.
- Shareholders' EquityShareholders' equity is the residual interest in a company's assets after deducting liabilities, comprising share capital, reserves and retained earnings.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.