Shareholders Equity Statement

Shareholders Equity – Toshiba is writing down its investment of $8.3 billion in Nuclear Power Business in US. This will result in wiping out the entire total shareholder’s equity of Toshiba! Obviously this is negative as the share decline led to the erosion of more than $7 billion in market value.

Shareholder’s equity is the interest of shareholders in the net assets of the company.  It is one of the most important aspects of the balance sheet. And there are so many components which we need to take into account under shareholders equity.

In this article, we will learn the nitty-gritty of shareholders equity.

• What is Shareholders Equity?
• Components of Shareholders Equity
• Shareholders Equity of Nestle
• Shareholders Equity Calculation Example
  • Shareholder’s Equity Calculation Example # 1
  • Shareholder’s Equity Calculation Example # 2
  • Shareholder’s Equity Calculation Example # 3
• Reasons for Negative Shareholder’s Equity
• Statement of changes in Shareholder’s Equity

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What is Shareholders Equity?

Shareholder’s equity is the interest of shareholders in the net assets of the company. You may wonder why! Here’s why.

The assets of the company are either financed by creditors or brought in by shareholders. Now, the creditors will be entitled to get paid till the extent they have contributed toward financing the assets. And the rest will be enjoyed by the shareholders. Shareholders are valued most because they share both of profits and losses.

Imagine that you invest in business. You would expect a meagre return from the investment (if not more than your opportunity cost). And then business doesn’t yield any profits. Instead, it incurs losses. As a result, you will not get any return. Whenever a shareholder invests into a business, he takes the risk of both – profit and loss. That’s why shareholders are valued most in a business. And that’s the reason maximization of wealth of the shareholders is one of the prime goals of business.

So, going back to our discussion of financing assets, here’s how things work. All the creditors who have invested in the assets are “liabilities” of business, because they need to be paid irrespective of profit or loss of business. So they will be paid first. And then whatever is left remains intact for the shareholders.

Thus, we can express assets in the following manner –

Assets = Liabilities + Shareholders Equity

If we can interchange the equation a bit, we will get the definition of shareholders’ equity formula –

Assets – Liabilities = Shareholders Equity

This residual interest (difference between assets and liabilities) is called “capital” in sole proprietorship business and the same is called “sum of individual capital” in partnership business.

 

Components of Shareholders Equity

Instead of looking into a formula, we will look at the components of Shareholders Equity which will help us understand what we need to take into account. Below is the snapshot of Amazon’s Shareholder’s Equity of 2015 and 2016

source: Amazon SEC Filings

#1 – Common Stock

Common Stock is the first and most important component of shareholders equity. Common stockholders are the owners of the company. They are the ones who will receive the profits and deal with loses after the company pays interest and dividends to preference shareholders. And they also have voting rights.

Here’s how to calculate common stock –

Common Stock = Number of shares issue * Par value per share

There are two things to consider here – the number of authorized share capital and the number of shares issued. Numbers of authorized share capital represent the numbers of shares the company can issue legally. And the number of share issued means the actual number of shares that the company has issued.

In Amazon, common stock outstanding is $5 million in both 2015 and 2016.

#2 – Additional paid-up capital

Additional means more than the share price. That means when the company receives premium on the shares, we would call it additional paid-up capital. Here’s how to calculate it –

Additional paid-up capital = (Share Price – Par Value) * Number of shares issued

Additional paid up capital for Amazon is $13,394 million and 17,186 million in 2015 and 2016, respectively.

#3 – Preferred Stock

Preferred stockholders are shareholders who have secondary rights in the net assets. They don’t have voting rights but they enjoy a fixed dividend even before anything is given to the common stockholders. Here’s how it is calculated –

Preferred Stock = Number of preferred shares issued * Par Value per share

There are no preferred stock in Amazon.

#4 – Retained Earnings

Retained earnings or losses are accumulated from the previous period. In simple terms, retained earnings are the amount company keeps after paying the dividend from net income. This amount is reinvested in the company. Here’s how we would calculate retained earnings for the end of the period –

Particulars
Retained Earnings at the beginning	***
(+) Net Income for the year	**
(-) Dividend paid	**
(+/-) Any change in accounting policy	*
Retained Earnings at the ending	***

Retained Earnings for Amazon is $2,545 million and 4,916 million in 2015 and 2016, respectively.

#5 – Treasury shares

Treasury shares is the sum total of all the common shares that have been purchased back by the company. Thus, treasury shares are the opposite of common equity shares. Common stock has a credit balance; whereas treasury shares have debit balance. That’s why all treasury shares are required to deduct from all equity components.Treasury Stock for Amazon is -$1,837 million for both 2015 and 2016.

#6 – Accumulated Other Comprehensive Income

Accumulated Other comprehensive income contains unrealized gains/losses that do not flow through the income statement. Examples are unrealized gains or losses from investments classified as available for sale, foreign currency translation gain/losses, pension plan gains/losses etc.

Accumulated Other Comprehensive Income for Amazon is -$723 million and -$985 million in 2015 and 2016, respectively.

#7 – Minority interest

This is an important part of shareholders equity. They have a minority stake in the company and no controlling power in the company like common stockholders. Minority shareholders are equity attributed to owners who are not of the parent company. Minority interest comes in the consolidated balance sheet. We can compute it in the following way –

Minority Interest = Total shareholders equity – Shareholders Equity attributed to parent

So, now we can have a look at the formula of shareholders equity –

Shareholders Equity
Paid-in Capital:
Common Stock	***
Preferred Stock	***
Additional Paid-up Capital:
Common Stock	**
Preferred Stock	**
Retained Earnings	***
(-) Treasury Shares	(**)
(-) Translation Reserve	(**)
Minority Interest	***

There is no minority interest in Amazon.

Shareholders Equity of Nestle

Let’s look at a practical example so that we can look at how to look at shareholders equity from a balance sheet.

We will take Nestle’s example.

Equity
Share Capital	319	322
Treasury shares	(7489)	(3918)
Translation reserve	(21129)	(17255)
Retained Earnings & other reserves	90637	90981
Total equity attributable to shareholders of the parent	62338	70130
Non-controlling interest	1648	1754
Total Equity	63986	71884

 

Total liabilities and equity

123992

133450

source: Nestle 2015 Financial Statements

We note that Shareholder’s Equity of Nestle is 63,986 million CHF and 133,450 million CHF in 2015 and 2014, respectively.

Please note that red highlighted items is what we deduct, i.e. treasury shares and translation reserve.

Once we add share capital and retained earnings and deduct treasury shares and translation reserve, we get the total equity attributable to shareholders of parent company. Also, note that since it is a consolidated balance sheet, we need to take into account the non-controlling interest (minority interest); so we add minority interest to the total equity attributable to shareholders of the parent company. And as a result, we got total shareholder’s equity.

Shareholders Equity Calculation Example

Now let’s look at few examples to understand how shareholders equity should be computed.

Shareholder’s Equity Calculation Example # 1

Mr A has got hold of the balance sheet of Q Company. But while traveling, Mr A lost the last part of the balance sheet. So how would he get to know about shareholders equity?

Here’s the remainder of the document.

Balance Sheet of ABC Company

	2016 (In US $)	2015 (In US $)
Assets
Current Assets	300,000	400,000
Investments	45,00,000	41,00,000
Plant & Machinery	13,00,000	16,00,000
Intangible Assets	15,000	10,000
Total Assets	61,15,000	61,10,000
Liabilities
Current Liabilities	200,000	2,70,000
Long term Liabilities	1,15,000	1,40,000
Total Liabilities	3,15,000	4,10,000

Here the computation is easy. Though we would not be able to get the particulars of each item in shareholders equity; we will be able to find out the total amount.

All Mr A needs to do is to deduct the total liabilities from the total assets.

	2016 (In US $)	2015 (In US $)
Total Assets (A)	61,15,000	61,10,000
Total Liabilities (B)	3,15,000	4,10,000
Shareholders Equity (A – B)	58,00,000	57,00,000

Mr A later went back to the office, sourced the whole balance sheet and saw the missing part of the balance sheet of Q company –

Shareholders Equity
Preferred Stock	550,000	550,000
Common Stock	50,00,000	50,00,000
Retained Earnings	250,000	150,000
Total Shareholders  Equity	58,00,000	57,00,000
Total liabilities & Shareholders Equity	61,15,000	61,10,000

And he found that his calculation of total shareholders equity was absolutely correct.

Shareholder’s Equity Calculation Example # 2

Mr S has the following information about Company Y –

Particulars	In US $
Common Stock	40,00,000
Preferred Stock	800,000
Retained Earnings	410,000
Accumulated Comprehensive Income (loss)	(50,000)
Treasury Shares	110,000
Minority Interest	600,000

Compute shareholders equity for Mr S.

Here we have all the information we need. Now we will put the values according to the formula.

Shareholders Equity
Paid-in Capital:
Common Stock	***
Preferred Stock	***
Additional Paid-up Capital:
Common Stock	**
Preferred Stock	**
Retained Earnings	***
(-) Treasury Shares	(**)
(-) Translation Reserve	(**)
Minority Interest	***

According to the formula, here’s the computation below –

Particulars	In US $
Common Stock	40,00,000
Preferred Stock	800,000
Retained Earnings	410,000
Accumulated Comprehensive Income (loss)	(50,000)
Treasury Shares	(110,000)
Minority Interest	600,000
Shareholders Equity	56,50,000

Shareholder’s Equity Calculation Example # 3

Mr T has the following information about Company W –

Particulars	In US $
Number of Common Shares	80,000
Number of Preferred Shares	20,000
Share Price (Common Shares)	150 per share
Share Price (Preferred Shares)	130 per share
Par Value (Common Shares)	100 per share
Par Value (Preferred Shares)	100 per share
Treasury Shares	100,000
Minority Interest	300,000

Additional information for retained earnings are also given –

Particulars
Retained Earnings at the beginning	200,000
Net Income for the year	500,000
Dividend paid	100,000
Amount appreciated due to change in accounting policy	50,000

Compute the shareholder’s equity for Mr T.

Let’s start with the calculation of retained earnings first and then we will look at other items one by one.

Particulars
Retained Earnings at the beginning	200,000
(+)Net Income for the year	500,000
(-)Dividend paid	(100,000)
(+)Amount appreciated due to change in accounting policy	50,000
Retained Earnings at the ending	650,000

Now, we will calculate the common stock.

Particulars	In US $
Number of Common Shares (A)	80,000
Par Value (Common Shares) (B)	100
Common Stock (A * B)	80,00,000

Now, we will calculate the preferred stock.

Particulars	In US $
Number of Preferred Shares (A)	20,000
Par Value (Preferred Shares) (B)	100
Preferred Stock (A * B)	20,00,000

We will look at the additional paid-up capital for common stock and preferred stock one by one.

To calculate the additional paid-up capital, we need to use the following formula –

Additional paid-up capital = (Share Price – Par Value) * Number of shares issued

Particulars	In US $
Number of Common Shares (A)	80,000
Share Price (Common Shares) (B)	150
Par Value (Common Shares) (C)	100
Difference (B – C)	50
Additional Paid-up Capital (Common Stock) [A * (B – C)]	40,00,000

 

Particulars	In US $
Number of Preferred Shares (A)	20,000
Share Price (Preferred Shares) (B)	130
Par Value (Preferred Shares) (C)	100
Difference (B – C)	30
Additional Paid-up Capital (Preferred Stock) [A * (B – C)]	600,000

Now we have all the information required to compute shareholders equity. Let’s compute it –

Shareholders Equity
Paid-in Capital:	In US $
Common Stock	80,00,000
Preferred Stock	20,00,000
Additional Paid-up Capital:
Common Stock	40,00,000
Preferred Stock	600,000
Retained Earnings	650,000
(-) Treasury Shares	(100,000)
Minority Interest	300,000
Total Shareholders’ Equity	1,54,50,000

Reasons for Negative Shareholder’s Equity

In some of the companies, you will find that Shareholder’s Equity is negative. Why is that so?

There can be many reasons. Some of the important ones are listed below.

#1 – Buyback of Shares

This is one of the most common reasons why Shareholder’s Equity turns negative. If the company buybacks shares, the shareholder’s equity portion gets reduced by that amount.

Please see below a graph depicting Negative Shareholder’s Equity of Philip Morris and Treasury Stock. we note that each year, Philip Morris has bought back shares. In 2016, Philip Morris Treasury Stock stood at $35.49 billion. We note that as the treasury stock increases, shareholder’s Equity reduced each year. currently, Shareholder’s Equity of Philip Morris is at -$12.69 billion.

source: ycharts

#2 – Writedowns

Writedowns could be another reason that can lead to negative shareholders equity. Most recent example is that of Toshiba. Toshiba invested heavily in its US Nuclear Power business and realized that it will not give returns as they expected earlier. They took a write-down of a whopping $8.3 billion in this business. Currently, Toshiba’s shareholder’s equity is at $2.92 billion. With this huge write-down, Toshiba’s shareholder’s equity will turn negative!

source: ycharts

# 3 – Continous Losses

Net losses reported by the company reduces the Retained Earnings and may lead Shareholder’s Equity.  However, if the company reports net losses each year, then it will surely lead to Negative Shareholder’s Equity. One such example is that of Sears Holdings. The company has been reporting losses for the past few years. This has resulted in negative retained earnings as well as Negative Shareholder’s Equity.

source: ycharts

Statement of changes in Shareholder’s Equity

Statement of changes in Shareholder’s Equity provides a detailed breakup and explains the changes in Common Stock Shares, Treasury Stock, Additonal Paid-in Capital, Accumulated Other comprehensive income, Retained Earnings etc.

Let us look at Amazon’s Statement of Changes in Shareholder’s Equity.

Let us take an example of Retained Earnings from the above statement and see how it got changed over the years. We note from above that as of the

• As of 1st January 2014, Retained Earnings Balance was $2,190 million
• During 2014, the company reported a net loss of $241 million.
• This resulted in the decrease in Retained Earnings to $1949 million as reported on 31st December 2014.
• This Retained Earnings of $1949 million becomes the starting balance for 2015.
• During 2015, Amazon reported a profit of 596 million, resulting in an increase in Retained earnings to $2,545 million on 31st December 2015.
• In 2015, Amazon reported a profit of $2,371 million, that increased its retained earnings further to $4,916 million.

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