When evaluating any company’s financial condition, accounting for the Stockholders’ Equity, among other things, is a good way of understanding just how well the company is doing in the long run. It’ll help you understand if the company is well at the moment, as well as how well it’s going to stay in the oncoming months.
What is Stockholders Equity?
Stockholder’s Equity is basically a sum of money and other value of any entity, minus the debts and other liabilities. All companies have Owner’s or Stockholders Equity because they all have both their earnings, the value coming from investments and debts. These are important parameters for accounting.
What you receive after calculations is a rather precise picture of what the company’s funds are in the particular month. But that’s not just that – you can compare it to the same number from previous months and see where the trend is going. This is equally important for figuring out whether the company is worth investing in or not.
Calculating Stockholders Equity
Today, you don’t need to conduct elaborate calculations or seek for the information to even start doing it. For most companies, both the liabilities and assets are offered in free access for everyone to see. Often, you’ll also be able to see the Equity on the Balance sheet, so your job will already be done for you.
Often, all you need to do is find the company’s Balance sheet online. It can generally be achieved in two ways:
- Simply browsing for it
- Going to the company’s official website and getting the information there.
Although it’s common for many public companies to post this sort of information in free access, you can’t always find it easily (for instance, in the case with smaller companies and ventures).
When you’ve found the Balance sheet for the particular month, the Equity is computed by taking the overall assets of the company, and then subtracting the liabilities (deferred revenue, debts, etc). The remaining funds are owned by the stockholders in one way or another.
Assets of the company X are $10,000;
Liabilities of the company X are $4,000,
Then, Equity would be: $6,000
What does it tell you?
How do you use this info, in general? It is completely subjective, although financial advisors often take into account this number while estimating whether the company is safe in the long term or not. If the company’s Equity is below 0, then it is likely going to experience bankruptcy soon.
Although, if you want to see whether it’s worth investing in the company or not, you should really compare the Equity numbers over a time period – a 6-month period would be great.
For instance, if the Equity kept shrinking for even longer than just half a year, then the company likely won’t recover from this trend and eventually go bankrupt. Depending on the intensity of this deterioration, you can even estimate when the company will go down, roughly.
If the Equity keeps going up, then the company is rather healthy. It might even be a good candidate for investing, although don’t make quick decisions and invest in such a company right away. There are many more parameters that need to be taken into account before you do.
The demand, supply, volume, as well as fundamental parameters all mess with the actual value of the company’s stock. That’s why you need to do a thorough analysis, and Equity is just one of the many parameters you’ll need. It’s definitely a reliable way of seeing just how healthy the company’s finances are at the moment.