What is Equity?
Equity is the portion of a company's capital that belongs to the owners. It represents the share of the company's assets not financed by debt. This capital is available to the owners for financing the business, making investments, and operating the company.
What forms of equity exist?
Common Stock: These are shares of the company owned by shareholders, providing them with voting rights and possibly dividends.
Retained Earnings: These are the accumulated profits earned by the company over time and reinvested.
Paid-in Capital: This is the capital actually contributed by shareholders.
Reserves with Participation: These are reserves set aside for specific purposes.
What are the advantages of equity for a company?
Independence from Lenders: Equity does not burden the company with interest or repayment obligations, increasing financial independence.
Investor Confidence: The availability of equity can enhance investor confidence, indicating that owners are invested in the company.
Flexibility: Equity provides the company with flexibility to invest in growth and innovation without relying on lenders.
Are there disadvantages to using equity?
Dilution: Issuing additional equity to raise capital can dilute the holdings of existing shareholders.
Dividend Payments: When the company earns profits, dividends must be paid to shareholders, which can strain the company's liquidity.
Owner Control: Issuing equity may reduce the control of founders and original owners over the company.
How is equity presented in the balance sheet?
In a company's balance sheet, equity is reported as the difference between assets and liabilities. It is a crucial metric reflecting the financial health and equity ratio of the company.
How can the equity be increased?
Equity can be increased by issuing new shares, retaining earnings, or introducing assets for sale that generate a profit.