Shareholder Equity Analysis

 Assignment # 3
 Shoaib Imran
 L1F17BSAF0065
 Section “B”
 Submission Date:
 7 th June 2020
 Submitted to: Sir Abid Noor

Shareholder’s Equity Ratio:

The shareholder equity ratio indicates how much of a company's assets have
been generated by issuing equity shares rather than by taking on debt. The lower
the ratio result, the more debt a company has used to pay for its assets. It also
shows how much shareholders might receive in the event that the company is
forced into liquidation.

The ratio, expressed as a percentage, is calculated by dividing total shareholders'

equity by the total assets of the company. The result represents the amount of
the assets on which shareholders have a residual claim. The figures used to
calculate the ratio are recorded on the company balance sheet

Importance:
It is important to understand that shareholders equity does not represent surplus
cash or cash left over after the payment of dividends. Rather, shareholders equity
demonstrates what a company did with its profits and capital -- it is the amount
the owners (the shareholders) have invested in the business since its inception.
These reinvestments are either asset purchases or liability reductions.

Formula of share holders equity:

Shareholders' equity may be calculated by subtracting its total liabilities from its

total assets,both of which are itemized on a company's balance sheet.Total
liabilities consist of current liabilities and long-term liabilities
For example:
In this formula, the equity of the shareholders is the difference between the total
assets and the total liabilities. For example, if a company has $80,000 in total
assets and $40,000 in liabilities, the shareholders’ equity is $40,000. This is the
business’ net worth.

What Is the Stockholders’ Equity Equation?

Stockholders’ equity has three major components: share capital, retained
earnings and treasury shares.

THE FORMULA:
Stockholders’ Equity = Share Capital + Retained Earnings – Treasury Shares

This formula is known as the investor’s equation where you have to compute the
share capital and then ascertain the retained earnings of the business.

 SHARE CAPITAL

The share capital represents contributions from stockholders gathered through

the issuance of shares. It is divided into two separate accounts common stock and
preferred stock.

 RETAINED EARNINGS

Retained earnings, also known as accumulated profits, represents the cumulative

business earnings minus dividends distributed to shareholders.

 TREASURY SHARES

Treasury shares are issued by the company and later reacquired. The cost of
these shares is deducted from stockholders’ equity.The stockholders’ equity is
only applicable to corporations who sell shares on the stock market. For sole
traders and partnerships, the corresponding concepts are the owner’s equity and
partners’ equity.
 SHAREHOLDER EQUITY RATIOS:
1. EPS ratio (Earning Per Share)

2. Dividend Yield

3. Price Earnings ratio (P/E ratio

4. Dividend per share

5. Dividend cover

6. Retention ratio

7. Price-to-book ratio

EPS ratio:
Earnings per share (EPS) is the portion of the company's distributable profit
which is allocated to each outstanding equity share (common share). Earnings per
share is a very good indicator of the profitability of any organization, and it is one
of the most widely used measures of profitability

Dividend Yield:
Dividend yield is the financial ratio that measures the quantum of cash dividends
paid out to shareholders relative to the market value per share. It is computed by
dividing the dividend per share by the market price per share and multiplying the
result by 100. A company with a high dividend yield pays a substantial share of its
profits in the form of dividends. Dividend yield of a company is always compared
with the average of the industry to which the company belongs

Price earning per ratio:

These measures the market price of the share as a proportion of the earnings per
share calculated above. The Earnings ratio which is also known as the PE ratio
compares the firm's share price against how much money each share is making.
The P/E ratio shows the expectations of the market and is the price you must pay
per unit of current earnings.
Dividend per share:
Dividend Per Share (DPS) is the total amount of dividends attributed to each
individual share outstanding of a company. Calculating the dividend per share
allows an investor to determine how much income from the company he or she
will receive on a per-share basis. The measure is used to estimate the number of
dividends that an income investor might expect to receive if he or she were to
buy a company's common stock

Dividend cover:
Dividend cover is the ratio of a company's earnings per share to the dividend per
share. It helps indicate how sustainable a dividend is. The inverse of dividend
cover is the Payout Ratio.

Retention ratio:
The retention ratio refers to the percentage of net income that
is retained to grow the business, rather than being paid out as dividends. It
is the opposite of the payout ratio, which measures the percentage of profit
paid out to shareholders as dividends. The retention ratio is also called
the plowback ratio.

Price-to-book ratio:
The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a
company's current market price to its book value. Book value is also the net asset
value of a company calculated as total assets minus intangible assets (patents,
goodwill) and liabilities. The market value of a company is its share price
multiplied by the number of outstanding shares. it’s a calculation that measures
the difference between the book value and the total share price of the company.