Shareholder Equity Ratio
Categories: Stocks, Accounting
Companies raise money in two fundamental ways. One involves selling equity. The company's founders find investors and give them part ownership in the company in exchange for cash. Then they use that cash to buy the things needed to run a business: factories, machines, posters with inspirational phrases printed over pictures of kittens, etc.
The other path to raising money uses debt. The company borrows the money it needs for factories and cat posters.
Equity is nice, because you don't have to pay the money back. However, there's a downside. Having all these other owners giving suggestions and calling you all the time can get annoying. But they make their money when the value of the company goes up. You don't have to send them regular checks (at least, not until you start paying dividends).
With debt, you have regular payments of interest and principal. It's a more expensive way to raise funds.
The shareholder equity ratio measures how much of the company's assets were purchased using equity. By extension, you can use this figure to deduce how much of the company was financed using debt. So...the shareholder equity ratio gives a good look at the equity/debt balance of a company. Also, if you're someone who has equity in the company, it suggests how much of the firm's assets would generate cash for you, in a situation where a liquidation might become necessary.
Related or Semi-related Video
Finance: What are retained earnings?26 Views
Finance allah shmoop what are retained earnings You know when
you eat really salty food and the next day you
have cankles it's all that water desperately trying Teo get
youto wiz out the loads of sodium chloride in your
body That's retained water well retained earnings and i'll sort
of work the same way you run a plastic cup
stamping business with catchy little phrases on the cubs Last
year you had a million bucks in sales and one
hundred grand in after tax earnings About eighty grand of
that earnings was in fact cash Why didn't you retain
in cash one hundred percent of your earnings What happened
to the twenty grand in cash there How did evaporate
Well you had to spend cash out of your earnings
on a cup plunging machine and then cost real cash
dough You'll amber ties that cost over time now and
get essentially a tax break because of it meaning you'll
show lesson earning so you'll pay less in taxes but
the cash won't change So this year's hundred grand was
a nice year but last year you had fifty grand
in cash profits and you had twenty grand in cash
Profits the year before then and before then you had
run it just cash flow break even for the previous
five years So it all looked like that So in
total you saved Or rather you retained cash earnings of
eighty plus fifty plus twenty or a sum total of
one hundred fifty grand That all now sits in your
b of a account doing a whole lot of nothing
of intern two percent a year for the privilege that
one hundred fifty grand that you have cumulatively retained Like
ankle's swelling is retained earnings which you will now use
to print more catchy titles in foreign languages Maybe don't
look up What those mean All right let's close the 00:01:49.043 --> [endTime] video now