The shareholders Equity / Return on Equity/Debt- Equity ratio/ balance sheet analysis
The shareholders Equity
I have given the example above to know the structure of Shareholders Equity. The first item is Equity share capital which is a face value or par value of Equity. When a company offers Equity to the public they would quote a par value, in which basis dividers are provided to shareholders.
Paid in capital: companies usually would quote a higher price than Face value of Equity that additional cost is called Premium, For example company A publish Equity to the public the face value is 10 but the stock price market price is 200 that means Company “A” is asking additional 190 rupees premium. Which amount will be added into Paid-in capital and also added into the Reserve surplus section.
Treasury stocks: A company has been piling up more cash for many over years. Thus, the company wants to buy back shares from the public market. After those stocks added into shareholders Equity. the company will be able to publish treasury stocks to the public later on. Further, treasury share would not provide dividends, if a company is frequently buy back its shares that results in EPS value will increase without increase of the profit.
Retained Earnings: the Net earning - after paid off the dividend, that remaining amount will be retained into shareholders funds that is used to repurchase Bonds and Equity from the open market, that repurchase program helps to reduce debt or outstanding Equity. If a company pay- out a significant amount of cash to dividends that will affect long-term growth.
These four items sum total is shareholders Equity. Lower capital investment and lower debt - the net income will turn to retain earnings that increments the value of Equity. The Equity analyst is keen on the Return on Equity ratio which points out how much investors get return from Equity. A company recorded below 17 that is considered that company is doing underperformance if it goes above 25 percent means that company is getting appropriate return from their Equity investment.
Net profit / Shareholders Equity = Return on Equity. A company is investing more money to upgrade machines and equipment which investment activities would eat up the company's profit rather the company is spending less money on reinvestment that funds go to shareholders fund which is used to buy back shares or reduce debt . Some companies pay out a higher percentage of dividend from net earnings that action would not increase shareholders value instead of that money accumulated into shareholders' funds, which bring potential benefits in the long haul.
Total liabilities / Equity = Debt/ Equity ratio.
Debt and Equity Ratio is another one important ratio that helps to gauge financial leverage. When a company is using interest bearing financial securities and bank loans that takeaway interest expenses from company”s profit as a result net profit will drop. Debt / Equity would be seen below 1.0 considered as less risky , that ratio above 2.0 considered higher would be risky.
Equity ratio = Shareholders Equity / Total assets .
Equity Ratio is insolvency ratio which is calculated Total assets divided by Equity investments . This ratio is used to find the proportion of owners' investment of total assets. High proportion of the owners fund would be less risky , a lower proportion of owners funds would be considered as a high risk. The conservative companies would use low financial leverage because equity financing is more cost effective than debt financing which ratio is below 50. Maybe that company is more conservative , if it exceeds 1 means the company is having enough cash to pay for long & short-term obligations
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