Tag Archives | shareholder

Shareholders Equity

See Also:
Return on Equity Analysis
Return on Common Equity (ROCE)
Retained Earnings
Balance the Balance Sheet
Return on Equity Example

Shareholders Equity Definition

Shareholders equity is an essential part of the accounting equation: Shareholders Equity = Total Assets – Total Liabilities. It is the difference between the value of a company’s assets and liabilities. This does not mean that every company has a shareholders equity account with money in it, yet it does mean that every business has this account on the balance sheet. This is because shareholders equity comes from the shareholders’ investments into the business and from retained earnings. In new companies, a large portion of this equity comes from the owners’ initial investments. In a more mature-stage company, retained earnings is often the majority of shareholders equity on the balance sheet.


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Retained Earnings

Retained earnings is one of the two components that make up Shareholders Equity. It is simply the net income that a business does not distribute to its shareholders. This account is listed underneath Shareholders Equity and is closed out after each period.

As mentioned, dividends are taken out of net income before going into the retained earnings account. The decision to pay dividends is affected by taxes and the required reinvestment for the next period. Distributing less or more affects a company’s taxes as well as the shareholders’ taxes. By paying out large dividends, a company can minimize its takes due. This transfers the tax liability to the shareholders. Keeping net income to reinvest into the business also has tax implications. Holding onto cash rather than paying dividends results in higher taxes.

Return on Equity

Return on equity (ROE) is a term to describe net income as a percentage of shareholders equity. In other words, return on equity is net income / shareholders equity. This percentage shows how efficient a company is at using shareholders equity to create a profit. When looking at a company, examining its return on equity over the last several years can show the true growth of a company. ROE is a fast indicator of sustainable growth, since net profit is the ‘organic’ way to reinvest into a company. For this reason, many refer to ROE as the sustainable growth rate.

Calling return on investment sustainable growth rate is helpful in planning cash needs. If a business has a ROE of 10%, then it knows that it can reinvest and grow 10% that year without outside investment. This can be very helpful for investors. If an entrepreneur shows a business plan with a projected 30% annual growth, sustaining a 15% ROE, and has no plans for outside investment, then he or she will inevitably have cash flow problems. Additional funds make up the disparity between the 15% and 30%. Being cognizant of a business’s sustainable growth rate helps plan for future cash flow problems. After all, underestimating cash needs is one of the top reasons for businesses that fail.

Shareholders Equity

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Return on Equity Analysis

See Also:
Financial Ratios
Return on Asset
Required Rate of Return
Return on Invested Capital (ROIC)
Debt to Equity Ratio
Return on Common Equity (ROCE)
What The CEO Wants You to Know How Your Company Really Works

Return on Equity Analysis

Defined also as return on net worth (RONW), return on equity reveals how much profit a company earned in comparison to the money a shareholder has invested.

Return on Equity Explanation

This term is explained as a measure of how well a company uses investment dollars to generate profits. Return on equity is more important to a shareholder than return on investment (ROI) because it tells investors how effectively their capital is being reinvested. Therefore, a company with high return on equity is more successful to generate cash internally. Investors are always looking for companies with high and growing returns on equity. However, not all high ROE companies make good investments. The better benchmark is to compare a company’s return on equity with its industry average. Generally, the higher the ratio, the better a company is.

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Return on Equity Formula

The following return on equity formula forms a simple example for solving ROE problems.

Return on Equity Ratio = Net income ÷ Average shareholders equity

When solving return on equity, equation solutions only form part of the problem. Thus, one must be able to apply the equation to a variety of different and changing scenarios.

Return on Equity Calculation

Average shareholders’ equity, or return on equity, is calculated by adding the shareholders’ equity at the beginning of a period to the shareholders’ equity at period’s end and dividing the result by two. Unfortunately, no simple return on equity calculator can complete the job that a solid understanding of ROE can.

For example, a company has $6,000 in net income, and $20,000 in average shareholders’ equity.

Return on equity: $6,000 / $20,000 =30%

In conclusion, a company that has $0.3 of net income for every dollar that has been invested by shareholder.

Return on Equity Example

Melanie, after seeing success in her corporate career, has left the comfortable life to become an angel investor. She has worked diligently to select companies and their managers, hold these managers accountable to their promises, provide advice and mentoring, and lead her partners to capitalization while minimizing risk. At this stage, Melanie is ready to receive her pay-out. Melanie wants to know her Return on Equity analysis ratio for one of her client companies.

Melanie begins by finding the net income and average shareholder’s equity for the venture. Looking back to her records, Melanie has invested $20,000 in the business. Her net income from it is $6,000 per year. Performing her return on equity analysis yields the following results:

Return on equity: $6,000 / $20,000 =30%

Melanie is happy with her results. Because she was purposeful and started small, she built the experience and confidence to be successful. She can now move on to bigger and better deals.

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Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

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London Stock Exchange (LSE)

London Stock Exchange (LSE) Definition

The London Stock Exchange or LSE is one of the largest exchange markets in the world in terms of trading volume and market capitalization. It also contains around 3,000 company listings. Furthermore, the first exchange established is the LSE(1801).

London Stock Exchange (LSE) Explained

The LSE History begins in 1801 when the Muscovy Company and the East India Company could not finance voyages to the east to China and India. The two companies passed shares in exchange for cash. In exchange, they promised these shareholders an amount of the profits. Thus, the LSE was established in 1801. The LSE market is owned today by the London Stock Exchange Group. Its trading hours are from 8:00 AM to 4:30PM local time. In addition, the LSE uses electronic trading using a system called SETS or Stock Exchange Electronic Trading Service. The main index for the LSE exchange is the FTSE 100 which shows the top 100 businesses listed on the LSE Market.

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London Stock Exchange

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London Stock Exchange

See Also:
New York Stock Exchange (NYSE)
Tokyo Stock Exchange (TSE)
National Stock Exchange of India (NSE)
Bombay Stock Exchange (BSE)

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How to Run an Effective Meeting

How to Run an Effective Meeting

When you run an effective meeting, it saves both time and money. In addition, you are also able to accomplish more. There are 5 steps on how to run an effective meeting, including the following:

Consensus/Feedback

Take a few minutes at the start of a meeting to clarify everyone’s understanding of the basic elements: purpose, agenda, ground rules, process, etc. Leave a few minutes at the end of a meeting for feedback, e.g. what worked, what didn’t work; did we achieve the meeting goals, why / why not.

Agenda/Purpose

Nothing ruins a meeting faster than getting off-track. Staying “on point” per an agenda should be your primary objective when you are running a meeting. All agendas should be in writing. Distribute them in advance whenever possible and make sure everyone understands why they’re there at the start of the meeting.

Ground Rules

Set rules for your meetings. Are cell phones allowed to be on? Is anyone allowed to speak up anytime he/she has something to say? When are challenges or criticisms allowed? Ground rules governing group behavior should be posted somewhere in the meeting space where everyone can see them. Get “buy-in” during your opening remarks.

Leadership/Facilitation

Just because you called the meeting or just because you’re “the boss” doesn’t mean you have to lead or facilitate the meeting. Ideally, someone who is not a stakeholder in the meeting should facilitate. Two benefits come from this. First, the facilitator can concentrate on making sure the meeting is productive without worrying about the content of the outcome. Second, you are free to engage fully in the meeting content without worrying about the process of the meeting. Also, ask another person to be a scribe when lists are being written on a flip chart or dry-erase board.

Process

From brainstorming for a new idea to getting through a highly structured weekly staff meeting, there is a process that can help move the group smoothly from start to finish. Get clarity that everyone understands the process, and then get everyone involved.

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how to run an effective meeting

See Also:
How to compensate sales person
How to Hire New Employees
Employee Health Insurance Plan
How to develop a controller
How To Train People For Success

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Free Cash Flow Analysis

See Also:
Cash Flow Projections
Discounted Cash Flow Analysis
Cash Cycle
Steps to Track Money In and Out of a Company

Free Cash Flow Analysis Definition

Free cash flow analysis is the amount of cash that a company can put aside after it has paid all of its expenses at the end of an accounting period.

Calculation of Free Cash Flow

Free cash flow = Net cash flow from operating activities – capital expendituresdividends

Or

= Net income + amortization + depreciation + deferred taxes – capital expenditures – dividends


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Applications

Free cash flow is an important measurement of the unconstrained cash flow of the company. It measures a company’s ability to generate internal growth and to return profits to shareholders.

Positive free cash flow means that a company has done a good job of managing its cash. If free cash flow is negative then the company may have to look for other sources of funding such as issuing additional shares or debt financing.

Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments.

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Dividends

See Also:
Dividend Yield
Capital Impairment Rule
Dividend Payout Ratio
Financial Ratios

Dividends Explained

Dividends are corporate profits distributed to shareholders. When a company makes a profit, the board of directors can decide whether to reinvest the profits in the company or to pay out a portion of the profits to shareholders as a dividend on shares. The board of directors determines the amount of the dividend on stocks, as well as the dividend payout dates.

Stockholders typically receive a certain amount of dividends per share for each share of stock they own. Tax rates on dividends, historically, have often differed from tax rates on capital gains from investments. If the dividend tax rate exceeds the capital gains tax rate, it may benefit the shareholders to avoid paying a dividend, and instead to carry out a stock repurchase.

Dividend Yield Definition

We define dividend yield as the dividend amount expressed as a percent of the current stock price. For example, if a stock will pay a $1 dividend at the end of this year, and today the stock price is $10, then that stock’s dividend yield is 10%.

10% = 1/10

Dividend yield equation

Dividend Yield = D1 / P0

D1 = Annual dividend per share amount (the dividend per share at time period one)
P0 = Current stock price (the price at time period zero)

Dividend Date Definitions

The process of distributing dividends to shareholders follows a set schedule. The board of directors announces the dividend on the dividend declaration date. Once the dividend has been declared, the company is legally obligated to pay the stated dividend to shareholders.

The next significant date is the ex dividend date. Investors who purchase the stock on or after the ex-dividend date will not receive the forthcoming dividend. Prior to the ex dividend date, the stock is considered cum dividend, or with dividend. This means that anyone buying the stock during this period will receive the forthcoming dividend.

The ex dividend day precedes the dividend record date, or the dividend date of record, by three days. Shareholders documented as owning the stock on the dividend record date will receive the dividend.

Last is the dividend payable date, or the dividend distribution date. This is the actual date on which the company pays out the dividends to its shareholders. The dividend payable date is typically about a month after the dividend date of record.

Dividend Payout Dates

• Dividend Declaration Date (stock is trading cum dividend)
• Ex-Dividend Date
• Dividend Record Date (three days after the ex-dividend date)
Payable Date for Dividend (one month after the dividend record date)

Dividend Signaling

Dividend signaling hypothesis refers to the idea that changes in a company’s dividend policy reflect management’s perceptions of the company’s future earnings outlook. Basically, it states that a change in a company’s dividend policy can be interpreted as a signal regarding future earnings. The problem is that a company can interpret the signals as contradictory messages.

Dividend Example

For example, if a company announces that it will increase its dividend yield, investors may interpret this as a positive signal. It could mean the company anticipates a profitable future and is allowing shareholders to benefit from these profits.

On the other hand, one can interpret an increase in the dividend payout rate as a negative signal. It could mean that the company has no good investment opportunities, and it has nothing better to do with its cash than to pay it out to shareholders as dividends.

Similarly, if a company announces that it will decrease its dividend payout rate, this can be interpreted as either a positive or negative signal. It could be interpreted as a positive signal because it could mean that the company has so many good investment opportunities that it needs all available cash for positive-NPV investments and projects. This could mean the company is growing and expanding.

On the other hand, if a company cuts its dividend rate, that could mean that the company anticipates lower earnings or even losses. This, of course, could be a bad sign. So as you can see, the logic behind the dividend signaling hypothesis makes sense, but because it can be interpreted in contradictory ways, the reading of the signals is not necessarily very meaningful.

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Common Stock Definition

See Also:
Intrinsic Value – Stock Options
Company Valuation
Basis Definition
Balance Sheet
Paid in Capital (APIC)
Capital Gains
American Depositary Receipts (ADRs)

Common Stock Definition

The common stock definition is shares of common stock represent ownership of a public or private corporation. Shares of common stock usually give the shareholder voting rights. Therefore, the shareholder can vote on matters of corporate policy and the selection of members of the board of directors. The more shares an investor owns, then the more influence that investor has on the company.

Shares of common stock typically trade on financial exchanges. Thus, their values fluctuate according to the company’s performance and the market’s perceptions of the company.

But if a company goes out of business and liquidates its assets, then the last ones to get their invested capital back are the common stockholders. Bondholders and preferred stock holders are reimbursed before common stockholders.

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