Learn something new every day More Info... by email
Companies provide financial transparency through regulatory filings that are submitted within a region and made public. A balance sheet is one of those documents, and it contains a statement of shareholders equity. This is a section of the financial statement that reflects differences in equity ownership, including common and preferred shares, during a certain period compared with that period in the previous year. Some of the features that are included in this statement are retained profits as well as additions and reductions in stock ownership. Greater amounts of equity represent financial strength and can lead to more financing options when a company is looking to expand.
There is order to the way that line items on a statement of shareholders equity are listed. First, the value of equity ownership at the start of a quarter or year is shown. Any additions or subtractions to that amount are reported next. The equity balance is then listed. Further details on the activity that drove changes in equity ownership are also illustrated.
A statement of shareholders equity allows the investment community, including financial analysts and investors, to determine any significant changes in a company's equity position. It also illustrates how any surplus in profits might have been directed. The equity portion of a balance sheet indicates any retained earnings, which are excess profits held onto by a company for reinvestment in that business. This type of information could be useful for investors who prefer to buy stock in companies that redistribute excess profits to shareholders in the form of dividend payouts rather than holding onto those earnings.
Employees of a publicly traded company might receive certain stock options as a part of a compensation package. These benefits might be reserved for the most senior company executives, but this is not always the case. Stock options offer employees the right to purchase shares of stock at a given price during a predetermined period of time. Any changes to the number of stock options that employees might have exercised is reflected on a statement of shareholders equity.
A company tends to drill down into specific uses of equity during a period in the statement of shareholders equity more so than in the broader equity section. Both sections on a balance sheet are related, but the statement of shareholders equity offers greater details on the factors that drove the change in equity ownership over a period of time. For instance, the equity portion of the balance sheet might indicate that there was a surplus of capital, and the shareholders equity segment should show how that excess income was applied.