The equity being offered to common shareholders by a company is known as common equity. It is very easy to evaluate common equity. Common equity can be calculated by deducting proffered equity from total equity of shareholder calculated by financial statements issued by the company. Common equity is an important ingredient of preparing investment road map for investors looking to invest in a company. Using common equity one can estimate ratios and projected returns on common equity. This is how potential investors can understand how lucrative it will it be invest in a particular company as a common shareholder. If you are an investor or investment offering company or running equity crowdfunding platform it is important for you to understand this.
This is how to calculate common equity:
You mainly need 3 parameters in order to calculate are Common Stock, Surplus Capital & Retained Earning.
Common Stock: Ask your accountant for a copy of the balance sheet of your company. You can come down to Common Equity by multiplying outstanding common stock by the face value of stock to get the desired figure. In case of a company having 10,000 shares with a face value of $5/per share, its common equity will be $50,000.
Capital Surplus can be found in the balance sheet of the company under the head Additional Paid-in Capital (APIC.) For instance, a company may have Capital Surplus worth $15,000.
Find out the Retained Earnings of the company generally included in the balance sheet under the title retained earnings below the Stockholders’ Equity section. Let’s assume the company’s retained earnings are $38,000.
Common Equity is sum of value of common stock+ surplus capital+ retained earnings. In this example common equity will be $50,000 + $15,000 + $38,000 = $103,000
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We’ll come up with more terms, explanation and their importance in our next blog post. Stay tuned.