Percentage problem regarding loss and networth

[Pranshu Tripathi]

Hello all

I am using a definition to create a dummy variable.

If the accumulated loss of the year is more than 50% of the previous four years' average networth, then the dummy has a value of 1.

Loss is always negative, but networth can be both positive and negative.

When networth is positive, then the definition is clear, but when the networth is also negative, then how should I interpret the percentage of accumulated loss to the previous four years' average networth?

Thanks and Regards

[Joro Kolev]

If we think of a simple example, say net worth is 100k, then 50k loss this year would be 50% loss of the previous net worth.
If net worth is say -100k, then 50k loss is still 50% of previous net worth.

Overall this dummy that you are describing seems to tell us what your losses are as a fraction of your net worth, in other words, it compares the loss order of magnitude to the net worth order of magnitude. For this purpose it does not seem to matter whether the net worth is positive or negative. The dummy just says whether your losses are materially important or not, when compared to the order of magnitude of your net worth.

[Pranshu Tripathi]

Hello Joro
Thanks for your reply.

You are right.

I read somewhere that anything above 100k (as in your example) will make the accumulated loss of 50k less than 50% of the networth. And anything below 100k will make it more than 50%. Negative networth is less than 100k, so the loss will be more than 50%.

A small denominator increases the value, and a negative number is also a small number.

What's your say on this?

Kind Regards