Shareholders’ Equity

Shareholders’ Equity section of your balance sheet is a little bit trickier than the previous two – Assets and Liabilities. On the surface there is nothing tricky about it; it shows how much of your total assets (of ‘your company’) is owned by your shareholders. The Liabilities section shows how much is owned by your creditors.

‘Owned’ in a sense of who gets what in case of – God forbid – the liquidation of your company. The structure of the ‘right side’ of your balance sheet shows the priority in which external claims on your assets will be satisfied in this grave case. Creditors come first, preferred stockholders second and common stockholders last.

From the standpoint of comprehensive business analysis, your company is a ‘going concern’; therefore, CBA is not interested much in these priorities. What is interesting, concerns the capital structure of your company and its implications on your financial value.

The trick is that, in addition to ‘classic’ common and preferred stock (the latter may or may not be used in your company), your Shareholders’ Equity section may contain a whole lot of ‘hybrid’ securities. Hybrids between debt and equity, that is. Which are not exactly ‘shares’ in your company in the usual meaning.

Therefore, I prefer to call this section just ‘Equity’ or even simply ‘Capital’. Which is perfectly OK with both GAAP and IFRS. Obviously, I will cover hybrid securities in a corresponding section below.