Last year, Shades International (a hypothetical company) invented the famous Eclipse Sunglasses that are widely popular around the world and especially in Japan and the Far East. Citizens of these countries love the new age sunglasses and are buying them as fast as they can. Shades owns the patent but contracts out to other companies to manufacture the glasses. Shades also leases its research and development facility, the only building it occupies. Royalties from the glasses exceeded $10 million last year and are expected to increase dramatically this year. Selected data (in millions of dollars) from Shades’ financial statements are as follows:
Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . $ 0.3
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5
Total stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.3)
In the next two months, Shades will be offering stock for sale to the public. Your friend is encouraging you to buy some of the stock. You are leery about the negative stockholders’ equity balance. Is Shades worth even considering as a possible investment?