Sec: B

Financial Analysis:

Name: Nabeekh Nayyer

Reg# L1F17BSAF0069

Shareholder Equity Analysis

 Shareholder equity Analysis
Shareholders’ equity essentially represents the amount of a business's holdings that
weren't purchased using debt (loans). Whether you’re investing and buying stock in a company.
Shareholders equity is the amount that shows how the company has been financed with the
help of common shares and preferred shares. Shareholders equity is also called Share Capital,
Stockholder’s Equity.

Sources
There are two important sources from which you can get shareholder’s equity. The first
source is the money originally invested in the company and all the other investments that are
made in the company after the initial payment and the
second source is the earnings that the company has
retained over a period of time through its operations.

Formula

The shareholders Equity can be calculated with the help of

the following formulas:
Shareholders Equity = Total Assets – Total Liabilities

Components of Shareholders’ Equity

There are six components of shareholders’ equity. These
are:

 Capital contributed by owners (or

common stock, or issued capital):

This is the amount of capital that was contributed to the

entity by its owners. For each class of common shares
issued, the entity must disclose the number of shares
authorized, issued, and outstanding.

 Preferred shares:

These shares have rights in relation to the receipt of

dividends or assets upon liquidation of the entity, that
takes precedence over the rights of common
shareholders.

 Treasury shares:

Otherwise referred to as treasury stock, these refer to

shares in an entity which have been repurchased by the entity. The repurchase of shares
reduces shareholders’ equity by the amount of the acquisition cost and also reduces the number
of shares outstanding.
 Retained earnings:

This refers to the aggregate amount of earnings that are recognized in an entity’s income
statements and have not been paid out as dividends.

 Accumulated other comprehensive income (reserves):

This includes other comprehensive income which has not been recognized as part of net
income and reflected in retained earnings.

 Non-controlling interest (or minority interest):

This represents minority shareholders’ interests in subsidiaries that have been consolidated by
the parent company but are not wholly owned by it.

Why does Shareholders’ Equity important?

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.
Shareholders equity somewhat reflects a company’s dividend policy, because it reflects a
company’s decision to either reinvest profits or pay them out to shareholders. Ultimately, most
analyses of shareholders equity focus on evaluating which action generated or would generate
the highest return for the shareholders

Example:
The example of a real company – Apple Inc. As per the annual report for the
period ended on September 29, 2018. Based on the information, determine the
stockholder’s equity of Apple Inc. as on September 29, 2018.
Therefore, the stockholder’s equity of Apple Inc.
as on September 29, 2018 can be calculated as,

Total Assets = $365,725

Total liabilities = $258,578
Shareholder equity= $365,725m –
$258,578m
Apple Inc.’s stockholder’s equity as on
September 29, 2018, stood at $107,147m
Major Ratios under Shareholders’
Some major ratios of shareholder equity analysis:
 EPS ratio (Earning Per Share)
 Dividend Yield
 Price Earnings ratio (P/E ratio)
Some other ratios that are related to
stockholder equity are:
 Dividend per share
 Dividend cover

EPS ratio (Earning Per Share)

The earnings per share ratio calculates the amount of money each ordinary share is
making Earning Per Share. People
that have ordinary shares are
entitled to vote at the firm's
meetings, they will also be paid
money (dividends) from the
company's profits after the company
has paid people with preference
share.

Example
Following are the Particulars of A Ltd for the purpose of calculating EPS.

Date Particulars Increas Decreas

e e
01.04.201 No. of Shares
3
01.09.201 Conversion of preference shares to equity 6000
3 shares
01.02.201 Buyback of shares 3000
 4
The Profit before tax of the company is Rs. 3, 50,000. Tax Rate @ 30%, Preference share
dividend Rs.10,000.
With the above facts, let us calculate EPS for the year.

Profit before Tax 3,50,000

Less: Tax @ 30% 1,05,000
PAT 2,45,000
Less: Preference Share Dividend 10,000
Net Profit 2,35,000
(Profit available for Equity Shareholders)
For the denominator part:
Weighted average no. of shares= (18,000*5/12) + (24,000*5/12) + (21,000*2/12) =
21,000 Shares

Therefore, EPS = 2,35,000/21,000 = 11.19

Dividend Yield
The Dividend Yield compares the dividends that shareholders are receiving against the
market price of ordinary shares.
The dividend yield formula is as follows:
Dividend Yield = Dividend per share
Market value per share

Example

The dividend yield ratio for each company is calculated as follows:

Company A:
= $7.08 / $29.00 = 0.24413 = 24.413%
Company B:
= $3.17 / $31.00 = 0.10226 = 10.226%

Price Earnings ratio 

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.

Example
The Island Corporation stock is currently trading at $50 a share and its earnings per
share for the year is 5 dollars. Island’s P/E ratio would be calculated like this:

As you can see, the Island’s ratio is 10 times. This means that investors are willing to
pay 10 dollars for every dollar of earnings. In other words, this stock is trading at a
multiple of ten.

Since the current EPS was used in this calculation, this ratio would be considered a
trailing price earnings ratio. If a future predicted EPS was used, it would be considered
a leading price to earnings ratio.
Dividends per share

Dividend per share is a measure

of the dividend pay-out per share
of a company’s common stock.
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. This
measures the size of the
dividends that the company
actually pays to its shareholders. It
is calculated using the following
formula:

Example

For example, a business issued

$10,000,000 of quarterly dividends in
the past year, plus an extra one-time
$2,000,000 special dividend. During
that period, the business had a
weighted average of 3,000,000
shares of common stock outstanding.
Based on this information, its dividend per share is:

$12,000,000 Total dividends paid ÷ 3,000,000 Shares = $4.00 Dividend per share
Dividend coverage ratio
Dividend Coverage Ratio states the number of times an organization is capable of
paying dividends to shareholders from the profits earned during an accounting period.

Formula
Dividend cover in respect of ordinary share capital may be calculated as follows:

Dividend Cover = Profit after tax - Dividend paid on Irredeemable

Ratio Preference Shares

Dividend paid to Ordinary Shareholders

Example
Following information relates to the financial statements of ABC PLC for the year ended
31st December 2012:
$m
Net profit 220
Dividend paid on ordinary shares 50
Dividend paid on redeemable preference shares 30
Dividend paid on irredeemable preference 20
shares

Dividend Cover in respect of ordinary shares may be calculated as follows:

220 - 20
Dividend Cover = = 4 times
50