Definition of owners' equity
owners' equity
Refers to the capital invested in a business by its shareowners
plus the profit earned by the business that has not been distributed
to its shareowners, which is called retained earnings. owners’
equity is one of the two basic sources of capital for a business, the other
being borrowed money, or debt. The book value, or value reported in a
balance sheet for owners’ equity, is not the market value of the business.
Rather, the balance sheet value reflects the historical amounts of capital
invested in the business by the owners over the years plus the accumulation
of yearly profits that were not paid out to owners.
Owners' equity
The total of all capital contributions and retained earnings on a business’s
balance sheet.
Related Terms:
The value of the owners’ interests in a company.
The discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.
The ratio of total assets to stockholder equity.
A management style that de-emphasizes the significance of economic
and market cycles, focusing instead on the analysis of individual stocks.
Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.
Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.
A common term for convertible bonds because of their equity component and the
expectation that the bond will ultimately be converted into shares of common stock.
An international equity placement where the offering is split into two
tranches - domestic and foreign - and each tranche is handled by a separate lead manager.
A company contributes to a trust fund that buys stock on behalf of
employees.
Represents ownership interest in a firm. Also the residual dollar value of a futures trading account,
assuming its liquidation at the going market price.
An agreement in which one party, for an upfront premium, agrees to compensate the other at
specific time periods if a designated stock market benchmark is greater than a predetermined level.
Also called a residual claim, a claim to a share of earnings after debt obligation have been
satisfied.
The simultaneous purchase of an equity floor and sale of an equity cap.
An agreement to contribute equity to a project under certain specified
conditions.
An agreement in which one party agrees to pay the other at specific time periods if a specific
stock market benchmark is less than a predetermined level.
Equity kicker
Used to refer to warrants because they are usually issued attached to privately placed bonds.
Equity market
Related:Stock market
Equity multiplier
Total assets divided by total common stockholders' equity; the amount of total assets per
dollar of stockholders' equity.
Equity options
Securities that give the holder the right to buy or sell a specified number of shares of stock, at
a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.
Equity swap
A swap in which the cash flows that are exchanged are based on the total return on some stock
market index and an interest rate (either a fixed rate or a floating rate). Related: interest rate swap.
Equity-linked policies
Related: Variable life
Equityholders
Those holding shares of the firm's equity.
Euroequity issues
Securities sold in the Euromarket. That is, securities initially sold to investors
simultaneously in several national markets by an international syndicate. Euromarket.
Related: external market
Foreign equity market
That portion of the domestic equity market that represents issues floated by foreign companies.
GEMs (growing-equity mortgages)
Mortgages in which annual increases in monthly payments are used to
reduce outstanding principal and to shorten the term of the loan.
Investor's equity
The balance of a margin account. Related: buying on margin, initial margin requirement.
Leveraged equity
Stock in a firm that relies on financial leverage. Holders of leveraged equity face the
benefits and costs of using debt.
Long-term debt to equity ratio
A capitalization ratio comparing long-term debt to shareholders' equity.
Preferred equity redemption stock (PERC)
Preferred stock that converts automatically into equity at a
stated date. A limit is placed on the value of the shares the investor receives.
Return on equity (ROE)
Indicator of profitability. Determined by dividing net income for the past 12
months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors
use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets
(ROA) multiplied by financial leverage (total assets/total equity).
Shareholders' equity
This is a company's total assets minus total liabilities. A company's net worth is the
same thing.
Stockholder equity
Balance sheet item that includes the book value of ownership in the corporation. It
includes capital stock, paid in surplus, and retained earnings.
Stockholder's equity
The residual claims that stockholders have against a firm's assets, calculated by
subtracting total liabilities from total assets.
Stratified equity indexing
A method of constructing a replicating portfolio in which the stocks in the index
are classified into stratum, and each stratum is represented in the portfolio.
Top-down equity management style
A management style that begins with an assessment of the overall
economic environment and makes a general asset allocation decision regarding various sectors of the financial
markets and various industries. The bottom-up manager, in contrast, selects the specific securities within the
favored sectors.
Total debt to equity ratio
A capitalization ratio comparing current liabilities plus long-term debt to
shareholders' equity.
RATE OF RETURN ON STOCKHOLDERS’ EQUITY
The percentage return or profit that management made on each dollar stockholders invested in a company. Here’s how you figure it:
(Net income) / (Stockholders’ equity)
RATIO OF DEBT TO STOCKHOLDERS’ EQUITY
A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
(Total liabilities) / (Stockholders’ equity)
Equity
Funds raised from shareholders.
Contra-equity account
An account that reduces an equity account. An example is Treasury stock.
Equity
Amounts contributed to the company by the owners (contributed capital) plus the residual earnings of the business (retained earnings).
Shareholders' equity
The total amount of contributed capital and retained earnings; synonymous with stockholders' equity.
Stockholders' equity
The total amount of contributed capital and retained earnings; synonymous with shareholders’ equity.
debt-to-equity ratio
A widely used financial statement ratio to assess the
overall debt load of a business and its capital structure, it equals total liabilities
divided by total owners’ equity. Both numbers for this ratio are
taken from a business’s latest balance sheet. There is no standard, or
generally agreed on, maximum ratio, such as 1:1 or 2:1. Every industry
is different in this regard. Some businesses, such as financial institutions,
have very high debt-to-equity ratios. In contrast, many businesses
use very little debt relative to their owners’ equity.
equity
Refers to one of the two basic sources of capital for a business, the
other being debt (borrowed money). Most often, it is called owners’
equity because it refers to the capital used by a business that “belongs”
to the ownership interests in the business. owners’ equity arises from
two quite distinct sources: capital invested by the owners in the business
and profit (net income) earned by the business that is not distributed to
its owners (called retained earnings). owners’ equity in our highly developed
and sophisticated economic and legal system can be very complex—
involving stock options, financial derivatives of all kinds, different
classes of stock, convertible debt, and so on.
return on equity (ROE)
This key ratio, expressed as a percent, equals net
income for the year divided by owners’ equity. ROE should be higher than
a business’s interest rate on debt because the owners take more risk.
stockholders' equity, statement of changes in
Although often considered
a financial statement, this is more in the nature of a supporting schedule
that summarizes in one place various changes in the owners’ equity
accounts of a business during the period—including the issuance and
retirement of capital stock shares, cash dividends, and other transactions
affecting owners’ equity. This statement (schedule) is very helpful
when a business has more than one class of stock shares outstanding
and when a variety of events occurred during the year that changed its
owners’ equity accounts.
Cost of Equity
Same as the cost of common stock. Sometimes viewed as the
rate of return stockholders require to maintain the market value of
the company's common stock.
Return on Common Equity Ratio
A measure of the percentage return earned on the value of the
common equity invested in the company. It is calculated by
dividing the net income available for distribution to shareholders
by the book value of the common equity.
Employee Stock Ownership Plan (ESOP)
a profit-sharing compensation program in which investments are made in
the securities of the employer
Equity
The difference between the total of all recorded assets and liabilities on the balance
sheet.
Equity
ownership. Common stock represents equity in a corporation.
Employee Stock Ownership Plan (ESOP)
A fund containing company stock and owned by employees, paid for by ongoing contributions by the employer.
Equity Method
Accounting method for an equity security in cases where the investor has sufficient
voting interest to have significant influence over the operating and financial policies of an
investee.
Equity Security
An ownership interest in an enterprise, including preferred and common stock.
Shareholders' Equity
The residual interest or owners' claims on the assets of a corporation
that remain after deducting its liabilities.
Debt/Equity Ratio
A comparison of debt to equity in a company's capital structure.
Equity
The net worth of a business, consisting of capital stock, capital (or paid-in) surplus (or retained earnings), and, occasionally, certain net worth reserves. Common equity is that part of the total net worth belonging to the common shareholders. Total equity includes preferred shareholders. The terms common stock, net worth, and common equity are frequently used interchangeably.
Equity Buy-Back
Refers to the investors percentage ownership of a company that can be re-acquired by the company, usually at a pre-determined amount.
Quasi-Equity
Funds, other than paid-up capital and retained earnings, employed in a business and which will remain in a business as permanent capital.
Shareholder's Equity
Represents the total assets of a corporation less liabilities.
equity
The net worth of a company. This represents the ownership interest of the shareholders (common and preferred) of a company. For this reason, shares or stocks are often known as equities.
Equity-based insurance
Life insurance or annuity product in which the cash value and benefit level fluctuate according to the performance of an equity portfolio.
Equity investment
Through equity investment, investors gain part ownership of the corporation. The primary type of equity investment is corporate stock.
Balance sheet
Also called the statement of financial condition, it is a summary of the assets, liabilities, and
owners' equity.
Common stock
These are securities that represent equity ownership in a company. Common shares let an
investor vote on such matters as the election of directors. They also give the holder a share in a company's
profits via dividend payments or the capital appreciation of the security.
Going-private transactions
Publicly owned stock in a firm is replaced with complete equity ownership by a
private group. The shares are delisted from stock exchanges and can no longer be purchased in the open
markets.
Shirking
The tendency to do less work when the return is smaller. owners may have more incentive to shirk
if they issue equity as opposed to debt, because they retain less ownership interest in the company and
therefore may receive a smaller return. Thus, shirking is considered an agency cost of equity.
accounting equation
An equation that reflects the two-sided nature of a
business entity, assets on the one side and the sources of assets on the
other side (assets = liabilities + owners’ equity). The assets of a business
entity are subject to two types of claims that arise from its two basic
sources of capital—liabilities and owners’ equity. The accounting equation
is the foundation for double-entry bookkeeping, which uses a
scheme for recording changes in these basic types of accounts as either
debits or credits such that the total of accounts with debit balances
equals the total of accounts with credit balances. The accounting equation
also serves as the framework for the statement of financial condition,
or balance sheet, which is one of the three fundamental financial
statements reported by a business.
balance sheet
A term often used instead of the more formal and correct
term—statement of financial condition. This financial statement summarizes
the assets, liabilities, and owners’ equity sources of a business at a
given moment in time. It is prepared at the end of each profit period and
whenever else it is needed. It is one of the three primary financial statements
of a business, the other two being the income statement and the
statement of cash flows. The values reported in the balance sheet are the
amounts used to determine book value per share of capital stock. Also,
the book value of an asset is the amount reported in a business’s most
recent balance sheet.
book value and book value per share
Generally speaking, these terms
refer to the balance sheet value of an asset (or less often of a liability) or
the balance sheet value of owners’ equity per share. Either term emphasizes
that the amount recorded in the accounts or on the books of a business
is the value being used. The total of the amounts reported for
owners’ equity in its balance sheet is divided by the number of stock
shares of a corporation to determine the book value per share of its capital
stock.
capital
A very broad term rooted in economic theory and referring to
money and other assets that are invested in a business or other venture
for the general purpose of earning a profit, or a return on the investment.
Generally speaking, the sources of capital for a business are
divided between debt and equity. Debt, as you know, is borrowed money
on which interest is paid. equity is the broad term for the ownership
capital invested in a business and is most often called owners’ equity.
owners’ equity arises from two quite different sources: (1) money or
other assets invested in the business by its owners and (2) profit earned
by the business that is retained and not distributed to its owners (called
retained earnings).
capital structure, or capitalization
Terms that refer to the combination of
capital sources that a business has tapped for investing in its assets—in
particular, the mix of its interest-bearing debt and its owners’ equity. In a
more sweeping sense, the terms also include appendages and other features
of the basic debt and equity instruments of a business. Such things
as stock options, stock warrants, and convertible features of preferred
stock and notes payable are included in the more inclusive sense of the
terms, as well as any debt-based and equity-based financial derivatives
issued by the business.
financial leverage
The equity (ownership) capital of a business can serve
as the basis for securing debt capital (borrowing money). In this way, a
business increases the total capital available to invest in its assets and
can make more sales and more profit. The strategy is to earn operating
profit, or earnings before interest and income tax (EBIT), on the capital
supplied from debt that is more than the interest paid on the debt capital.
A financial leverage gain equals the EBIT earned on debt capital
minus the interest on the debt. A financial leverage gain augments earnings
on equity capital. A business must earn a rate of return on its assets
(ROA) that is greater than the interest rate on its debt to make a financial
leverage gain. If the spread between its ROA and interest rate is unfavorable,
a business suffers a financial leverage loss.
market capitalization, or market cap
Current market value per share of
capital stock multiplied by the total number of capital stock shares outstanding
of a publicly owned business. This value often differs widely from
the book value of owners’ equity reported in a business’s balance sheet.
net worth
Generally refers to the book value of owners’ equity as reported
in a business’s balance sheet. If liabilities are subtracted from assets, the
accounting equation becomes: assets - liabilities = owners’ equity. In this
version of the accounting equation, owners’ equity equals net worth, or
the amount of assets after deducting the liabilities of the business.
return on investment (ROI)
A very general concept that refers to some
measure of income, earnings, profit, or gain over a period of time
divided by the amount of capital invested during the period. It is almost
always expressed as a percent. For a business, an important ROI measure
is its return on equity (ROE), which is computed by dividing its net
income for the period by its owners’ equity during the period.
financial accounting
a discipline in which historical, monetary
transactions are analyzed and recorded for use in the
preparation of the financial statements (balance sheet, income
statement, statement of owners’/stockholders’ equity,
and statement of cash flows); it focuses primarily on the
needs of external users (stockholders, creditors, and regulatory
agencies)
Interest
The cost of funds loaned to an entity. It can also refer to the equity ownership
of an investor in a business entity.
Security
Either the collateral on a loan, or some type of equity ownership or debt, such
as a stock option or note payable.
Cash Flow Provided or Used from Financing Activities
Cash receipts and payments involving
liability and stockholders' equity items, including obtaining cash from creditors and repaying
the amounts borrowed and obtaining capital from owners and providing them with a return on,
and a return of, their investments.
Balance Sheet
A financial report showing the status of a company's assets, liabilities, and owners' equity on a given date.
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