While reviewing LSC Communications (lksdq) financial statements for calander year ended Dec 2019, I noticed something very interesting on their consolidated balance sheet. It states that their total liabilities of $1.721 billion exceed their total assets of $1.649 billion, resulting in a total negative equity of about $72 million.
But here’s what I found when I looked into the balance sheet details a bit. The line item Property, plant and equipment-net was $440 million. That seemed a little low to me for a company doing more than $3 billion in sales annually, so here’s what I found in Note 8. There was actually a total of about $3.704 billion for those items, but was carried on the books at $440 million due to accumulated depreciation of $3.264 billion. Of the $3.7 billion, $698 million represented the pre-depreciated land and buildings (with the remaining $3.006 billion being the equipment/machinery).
So the total category of Property, plant and equipment has a total depreciation of about 88% (3.264/3.702). While this may fairly represent the current value of the equipment/machinery, it does not likely fairly represent the current value of the land and buildings (my experience is that these things generally go up in value over time, not down). So although the $698 million of land and buildings seems to be carried on the books at a net value somewhere in the neighborhood of $80 million (due to the accounting mechanism of depreciation), there may be another $600 million in current value for this asset class. Even if there was only $300 million of additional asset value (half of the difference between the original cost and the depreciated value, that would flip the balance sheet’s negative equity of $72 million on its head, converting it to a positive equity of more than $200 million.
With the stock currently trading a total market cap of around $1 million, the fact that the net equity of the firm may be closer to a positive several hundred milllion rather than a negative $72 million might affect the trading upside here.
As always, simply my opinion.
*Please note that since I was unable to determine the breakdown of acummulated depreciation between the individual components of property, plant and equipment, I made the assumption that the aggregate 88% accum depreciaition applied equally to each of the category components.
