STOCKHOLDERS' EQUITY: WHAT IS IT, TYPES, CALCULATION AND EXAMPLES - DUDAS - 2025

The stockholders ' equity is shareholders' equity, which represents the amount of money that would be returned to the shareholders of a company if all assets are liquidated and all were paid the debt of the company.

Stockholders' equity is generally referred to as the difference between the value of the assets and the value of the liabilities of something that is property. It is also called the owner's equity.

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Alternatively, the term can also refer to the capital stock of a corporation. The value of the equity capital depends on the future economic prospects of the company.

Stockholders' equity is one of the most common financial indicators used by analysts to assess the financial health of a company. Shareholders' equity can also represent the book value of a company.

For a company in liquidation, equity is what remains after all liabilities have been paid.

Net assets

In financial accounting, stockholders' equity consists of the net assets of an entity. Net assets are the difference between total assets and total liabilities. The owner's equity appears on the balance sheet, one of the primary financial statements.

The assets of a company can be tangible and intangible elements. Intangibles include items such as brand names and copyrights. Tangible assets include land, equipment, and cash.

What is stockholders' equity?

When a business is started, the owners invest in the business to finance its various operations.

According to the model of a limited liability company, the company and its owners are separate entities, so the company is considered to owe these funds to their owners, as a liability in the form of capital stock.

Over the course of the business, the company's equity will be the difference between its assets and debt liabilities. This is the accounting equation.

Thus, stockholders' equity represents the amount of money that would be returned to a company's shareholders if all assets were liquidated and all of the company's debt was paid.

You can think of equity as a degree of ownership of any asset, after subtracting all debts associated with that asset. It represents the shareholders' participation in the company. The calculation of equity is the total assets of a company minus its total liabilities.

Liquidation of a company

When a business is liquidated during bankruptcy, the proceeds from the assets are used to repay it to the different creditors.

These creditors are ranked by priority, with secured creditors being paid first, followed by the other creditors. The owners are paid at the end.

Stockholders' equity is this remaining or residual claim against assets, which is paid only after all other creditors have been paid.

In those cases where even the creditors cannot receive enough money to pay the bills owed to them, the equity to be paid to the owners is reduced to zero, because there is nothing left to be able to repay it.

Types

Social capital

It is the portion of the capital that has been obtained by issuing common shares in the corporation to a shareholder, generally in cash. "Share capital" can also indicate the number and types of shares that make up the share structure of a company.

In a strictly accounting sense, share capital is the nominal value of the issued shares. That is, the amount of its value, as indicated on the share certificates.

If the price assigned to the shares is greater than their nominal value, as in a rights issue, the shares are said to be sold at a premium, interchangeably called additional paid-in capital or overpaid capital.

Conversely, when shares are issued below par value, they are said to be issued at a discount or partially paid.

Preferred stock

They are a type of share that can have any combination of characteristics that common shares do not have, such as ownership of both an equity instrument and a debt instrument.

Preferred shares are ranked higher than common shares, but are subordinate to bonds, in terms of claims or rights to their share of the company's assets.

They can take precedence over common shares in dividend payment and liquidation. The terms of the preferred shares are described in the articles of incorporation of the issuing company.

The rating for preferred shares is lower than for bonds, because preferred dividends do not have the same guarantees as the interest payment on bonds, and because the claim of preferred shareholders is lower than that of all creditors.

Capital surplus

It is also known as the issue premium. It is an account that can appear as a component of stockholders' equity on the balance sheet, which represents the amount that the corporation collects by issuing shares that exceed the par value of common shares.

Together, the common shares and preferred shares issued and paid, plus excess capital, make up the total amount that investors actually pay for the shares when they are issued, assuming no adjustments or modifications are made.

Stocks for which there is no par value will not have any form of capital surplus on the balance sheet. All funds from the issuance of shares will be credited to the common shares issued.

Retained earnings

It is the accumulated net profitability that the company retains at a given time, at the end of the accounting period.

The net profit or loss at that time is transferred from the profit and loss account to the retained profit account. If the balance of the retained earnings account is negative, it can be called accumulated losses or retained losses.

Any portion of the amount credited to this account can be capitalized by issuing bonus shares. The balance is available to be distributed as dividends to shareholders, and the remainder is carried over to the next period.

In accounting terms, the retained earnings at the end of one period are the opening retained earnings for the next, adding the net profit or loss for that period, deducting the bonus shares issued and the dividends paid in that period.

Treasury shares

A treasury share is a share that is purchased by the same issuing company, which reduces the number of shares outstanding on the open market.

Share buybacks are used as a tax-efficient method of putting cash in the hands of shareholders, rather than paying dividends, in jurisdictions that treat capital gains more favorably.

Sometimes companies do this when they feel that their stocks are undervalued in the open market. Other times, they do it to reduce the dissolution of employee compensation incentive plans.

Another reason for share buybacks is to protect the company against an acquisition threat.

Choices

It is a contract that grants the owner or holder of the option the right, but not the obligation, to sell or buy a product or asset, at a specific exercise price before a specific date, depending on the form of the option.

The strike price can be set by reference to the market price of the security on the day the option is withdrawn, or it can be set at a discount or premium.

The seller has a corresponding duty to carry out the transaction (buy or sell) if the owner or buyer executes the option.

How is it calculated?

It is important that shareholders are aware of the financial stability of the companies in which they invest. The following formula and calculation can be used to determine the risk involved in investing in a company.

Stockholders' equity = value of total assets - total liabilities.

The balance sheet contains the basis of the accounting equation, which is as follows: Assets = liabilities + shareholders' equity.

However, you want to find the equity value, which can be done as follows:

- Locate the total assets of the company in the balance sheet for the accounting period.

- Locate the total liabilities, which should be listed separately on the balance sheet.

- Subtract total assets from total liabilities in order to obtain stockholders' equity.

- Total assets will be equal to the sum of liabilities and stockholders' equity.

Examples

If someone owns a car, which is an asset, worth $ 15,000, but owes $ 5,000 on a loan, which is a liability, against that car, then the car represents $ 10,000 of equity.

Equity can be negative if liabilities exceed assets. Negative net worth is often referred to as a shareholder deficit.

Shareholders' equity (or shareholders' fund, shareholders' capital, or similar terms) represents the capital of a company, which is divided among the shareholders, who are the owners of common or preferred shares.

Exxon Mobil

Below is a portion of the balance sheet data for Exxon Mobil Corporation as of September 30, 2018, in millions of dollars:

- Total assets were $ 354,628.

- The total liability was $ 157,797.

- Total equity was $ 196,831.

The accounting equation by which: assets = liabilities + stockholders' equity is calculated as follows:

Shareholders' equity = $ 196,831, or what is the same, is equal to: $ 354,628 (total assets) - $ 157,797 (total liabilities).

References

1. Wikipedia, the free encyclopedia (2019). Equity (finance). Taken from: en.wikipedia.org.
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3. Investing Answers (2019). Equity. Taken from: investinganswers.com.
4. Wikipedia (2019). Investment capital. Taken from: es.wikipedia.org.
5. Steven Bragg (2019). How to calculate total equity. Accounting Tools. Taken from: accountingtools.com.
6. CFI (2019). Equity Accounts. Taken from: corporatefinanceinstitute.com.