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Shareholder Equity & Retained Earnings
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I'm just going to speak at a very high
level here on the stock component
0:00
of the equity section,
as it gets a little advanced.
0:04
The equity section of a balance sheet
shows the different types of stock
0:08
the company has issued and authorized,
as well as retained earnings.
0:11
We'll elaborate more on what retained
earnings are later in this video.
0:17
There can be a lot of detail in this
equity section that shows different types
0:21
of common shares, par values,
paid in capital, and treasury stock.
0:25
We're not going to get
into the details of that.
0:31
Just know that in simplistic terms,
0:33
this represents the share value
of a stocks when they're issued.
0:36
For larger, publicly listed companies,
0:41
you might see a lot of
different stock lines here.
0:43
In startups and smaller companies,
0:46
you'll likely see different line items for
series A, series B, etc.
0:48
Then, there is another line item in
the equity section for retained earnings.
0:54
Retained earnings are the amount of
net income the company has generated
0:59
since inception that has been
reinvested in the business.
1:03
So again, simple examples at a high level.
1:08
But let's say the company has generated
a net profit of $100,000 this year.
1:11
We decided to reinvest all of
that money in the business, so
1:16
our retained earnings would be
increased by $100,000 this year.
1:20
If we had lost $100,000 then our
retained earnings would decrease.
1:26
And if we've never generated a profit,
this would be an accumulated loss or
1:31
accumulated deficit instead
of retained earnings.
1:36
If the company had issued some dividends
to shareholders, let's say $20,000
1:39
in this year, then our retained
earnings would only go up by $80,000.
1:44
So, when you sum up all these rows, that
gets you total shareholder's equity or
1:49
the book value of
the equity of the business.
1:55
If someone asks you how
much a business is worth,
1:59
that's a potentially
difficult question to answer.
2:01
It's a question about value which
can be nuanced and subjective.
2:04
What is not nuanced or subjective.
2:09
And a potentially good response if you're
not wanting to go down the path of a long
2:11
conversation is to use the book
value of the business as a response.
2:15
So if someone asked you, hey, what's
the value of this privately held business?
2:20
One potential answer to the question is to
look at the balance sheet, find the total
2:25
shareholder equity line, and tell them
the book value of this business is XYZ.
2:30
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