calculating owner's equity
Okay, let’s say that you are looking at stocks that you may want to buy, and you come across Company X, which I just made up. The first thing you want to do to assess this stock is to pull up the company’s assets. When I am talking about assets I mean pretty much anything that you own, that is worth some cash, or it has some value. To give you an example, your home is an asset, your clothes are an asset, your technology is an asset. Assets are good things that will benefit us in some way currently, or in the future. Now, let’s pull up the fake assets of Company X, and keep in mind, all this data changes from stock to stock, and all this data is easily accessible through Yahoo or Google Finance. Some companies however, don’t make these numbers public, in which case you can’t do your own calculations. Okay, now let’s make up some numbers for the assets, as these numbers like I said change from stock to stock for obvious reasons. Okay let’s say that the assets of Company X are worth 10M dollars, let’s not worry about things like who’s calculating this number, how it was determined, or what each component of this number is worth. Let’s just say that we all agree that the assets of Company X are worth 10M dollars. Now we’ve got our assets number. But, let’s say that Company X also borrowed some money, maybe through a loan or bond or something to that extent. This is very common for a company. Let’s say that this number is 5M dollars. This means that Company X has 5M dollars in debt and liabilities. Debt and liabilities are not good, and in case you don’t know this is what causes some companies to go bankrupt.
Now we want to figure out, what cash is left over for the owners of the company and stock which you are if you invest in a particular stock. So, the simple formula to calculate this is 10M in assets, which is the money that the company made through sales, property, all their assets added up, minus all the liabilities that the company has, which right now is 5M. With Company X, you can find that there is 5M dollars left over for the owners of the company. This is known as owner’s equity. Again to recap, the formula for calculating the owner’s equity, or the money for the owners is assets minus liabilities.
So, getting back on track, if you are a part owner of a company, you have a piece, or partly own the owner’s equity, which in the case of Company X is 5M dollars. That means that as a part owner, you own a piece of that 5M dollars. This 5M dollars of equity is also known as a company’s book value which is a measure when you are valuing stocks. Now, this also ties in with everything we talked about when we covered shares of stocks briefly. Now let’s also say that Company X has 500 000 shares that are made public. With all this data you can figure out the stock price, or what the base stock price should be in reality based on its book value. So, from here all you need to do is divide the equity by the amount of shares. In this scenario, the equity is 5M dollars divided by 500 000 shares. When you divide these numbers you figure out that the book value per share of Company X is 10 dollars meaning this would be a reasonable value to buy the stock at. So, if the stock price on the market for Company X is $8 than we might want to buy it because it seems undervalued. However, consider the fact that stocks are valued and have prices based on supply and demand. What you can do with these numbers is personally evaluate a company to see if it is properly valued. Again, do keep in mind, that some companies will not publicly release numbers like the amount of shares available, or the exact equity numbers. However, if any company does have these numbers, they will be placed on what is known as a company’s balance sheet. These balance sheets are accessible through again Yahoo or Google Finance as they are often reported during quarterly earnings reports, which are also key to the success of a stock, and will be touched upon later.
Now we want to figure out, what cash is left over for the owners of the company and stock which you are if you invest in a particular stock. So, the simple formula to calculate this is 10M in assets, which is the money that the company made through sales, property, all their assets added up, minus all the liabilities that the company has, which right now is 5M. With Company X, you can find that there is 5M dollars left over for the owners of the company. This is known as owner’s equity. Again to recap, the formula for calculating the owner’s equity, or the money for the owners is assets minus liabilities.
So, getting back on track, if you are a part owner of a company, you have a piece, or partly own the owner’s equity, which in the case of Company X is 5M dollars. That means that as a part owner, you own a piece of that 5M dollars. This 5M dollars of equity is also known as a company’s book value which is a measure when you are valuing stocks. Now, this also ties in with everything we talked about when we covered shares of stocks briefly. Now let’s also say that Company X has 500 000 shares that are made public. With all this data you can figure out the stock price, or what the base stock price should be in reality based on its book value. So, from here all you need to do is divide the equity by the amount of shares. In this scenario, the equity is 5M dollars divided by 500 000 shares. When you divide these numbers you figure out that the book value per share of Company X is 10 dollars meaning this would be a reasonable value to buy the stock at. So, if the stock price on the market for Company X is $8 than we might want to buy it because it seems undervalued. However, consider the fact that stocks are valued and have prices based on supply and demand. What you can do with these numbers is personally evaluate a company to see if it is properly valued. Again, do keep in mind, that some companies will not publicly release numbers like the amount of shares available, or the exact equity numbers. However, if any company does have these numbers, they will be placed on what is known as a company’s balance sheet. These balance sheets are accessible through again Yahoo or Google Finance as they are often reported during quarterly earnings reports, which are also key to the success of a stock, and will be touched upon later.