Equity: Key Elements in Financial Analysis
•By Mahersaham Team
Artikel ini juga tersedia dalam Bahasa Melayu
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Right then, today I shall continue the series on key elements in financial analysis.
In Part 1, I briefly explained the 5 key elements of financial analysis.
In Part 2, I explained in detail about the asset element.
In Part 3, I explained in detail about the liability element.
For this instalment, I shall explain in detail the third element, which is equity.
In simple terms, equity refers to the net ownership of shareholders.
According to Investopedia, equity is commonly referred to as shareholders'' equity (or owner''s equity for privately-owned companies).
It represents the amount of money that would be returned to a company''s shareholders if all of the assets were liquidated and all of the company''s debts were paid off in the event of liquidation.
The formula is E (Equity) = A (Asset) – L (Liability).
For example, when Company DEF Sdn Bhd is to be incorporated, it requires initial capital to be established.
Let us take the example of Company DEF being listed on Bursa Malaysia. The capital at that point would be the IPO.
Subsequently, Additional Paid-in Capital arises when corporate exercises such as rights issues take place, as well as when warrants are exercised to add capital to the company.
This typically occurs after tax (profit after tax and minority interest).
A company will generate sales or revenue each year.
The calculations involved include the deduction of expenses, inventory purchases, staff salary payments, and tax payments.
After all deductions, the remaining balance is the profit owned by the company.
When considering profit from the perspective of owner''s equity, this is what belongs to the shareholders.
Owner''s equity means that when a company is profitable, the shareholders'' value increases.
However, if the company makes a loss, the shareholders'' value decreases.
Apart from profits derived from main operations, there are also gains from other investments.
These gains are also added to the owner''s equity.
It is important to understand that within equity, profits will increase owner''s equity whilst losses will reduce it. Understanding the equity element helps investors assess the true value of a company.
Equity refers to the ownership value of shareholders in a company. It is calculated by deducting total liabilities from total assets. Equity is also known as shareholders'' equity or owner''s equity.
The main components of equity include Share Capital, Retained Earnings (accumulated profits), and Other Comprehensive Income (income from other investments).
Equity increases when a company is profitable and decreases when a company incurs losses. Dividend payments will also reduce equity as they reduce the company''s retained earnings.
Investors need to understand equity as it shows the true ownership value in a company. Increasing equity typically indicates a healthy and growing company, whilst declining equity may signal financial difficulties.
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