Statement of Shareholders’ Equity

What is the “Statement of Shareholders’ Equity”?

The statement of shareholders’ equity reports the changes in the value of shareholders’ equity or ownership interest in a company from the beginning of an accounting period to the end of it.

It is a financial document that a company issues as part of its balance sheet details, and it gives investors information about why accounts have changed. It gives investors more transparency about the changes in equity accounts and reports on the business activities that contribute to the movement in the value of shareholders’ equity. It is essentially the net worth of the shareholders’ stake in the company and includes items such as retained earnings, share buybacks, dividend payments, and other stock-based compensation for the period.

What is Shareholders’ Equity?

Shareholders’ equity represents the ownership interest of shareholders in a company. It is calculated by subtracting total liabilities from total assets, providing a snapshot of the company’s financial health and net worth. It is essentially what’s left over in the company after all its debts (liabilities) are paid, and denotes the shareholders’ claim on the existing assets. Shareholders’ equity is usually a positive figure, meaning that the company has enough assets to cover its liabilities.

The statement of shareholders’ equity reports the changes in the value of shareholders’ equity from the beginning of an accounting period to the end of it. This document gives investors more transparency about the changes in equity accounts and shows how the shareholders’ net worth has changed over time. It includes various line items such as preferred stock, common stock, additional paid-in capital, retained earnings, treasury stock, accumulated other comprehensive income (loss), and non-controlling interests.

Who Uses a Statement of Shareholder Equity?

A statement of shareholder equity is primarily used by investors and analysts. It provides detailed information about the changes in the value of shareholders’ equity or ownership interest in a company over a specific accounting period. This document helps investors understand the reasons behind the changes in equity accounts and the business activities that contribute to these movements.

Additionally, companies issue this statement as part of their balance sheet to give investors transparency about why accounts have changed. If a company is undertaking a large, planned share buyback program, for example, the spending on this (for the period) will be reported in the statement of shareholders’ equity.

Why Should You Use a Statement of Shareholder Equity?

Let’s examine the different line items within the statement.

The statement of shareholders’ equity gives investors a much better understanding of how the individual equity accounts have changed during the period. This is distinct from the income statement which can provide details of sales, and profitability for the period. The statement of shareholders’ equity gives us the details of any capital raising and repatriating, as well as other items which impact the equity accounts directly (and are not included in the income statement).

Below are Hershey Company’s consolidated statements of stockholders’ equity.

The Hersey Company – Extract from Statement of Shareholders’ Equity

This extract details the movements in shareholders’ equity (or stockholders’ equity) from the start of the period, January 1^st 2016 to the end of the period, December 31^st 2016.

Total stockholders’ equity declined from just over $1bn in January, to $828m at the close of the year. We can see from the information provided that net income for the period added $720m, but then dividends were paid out and there was a $593m share repurchase. Thus, the year ended with lower shareholders’ equity.

Analysts and investors can use this information to ensure that the company is growing each year and producing a net income (rather than loss). This can be put in the context of a company’s progress with any share repurchase programs (typically longer than 12-month plans) as well as planned dividend payments and other spending or stock-based compensations to see how healthy the company is. If a company’s annual earnings are shrinking and its dividend obligations are rising each year (or a share buyback program is proving more expensive or larger than planned), this will become obvious on the stockholders’ equity statement.

What Does the Statement of Shareholder Equity Include?

There are some terms on the shareholders’ equity statement which may be less familiar to analysts. When looking at a company’s financials it is important to find out as much information as possible about the background of the company. For example, some companies may have a series of different classes of shares, some may have pref stock (others may not) and companies will set their own parameters for dividend payments or share buyback plans.

Preferred stock

This is a special ownership stake in the company that provides holders a higher claim of the company’s earnings than common stockholders if there is a liquidity event. Typically, a preferred stock will pay a dividend, but preferred stockholders typically have no voting rights in the company. Companies report preferred stock at par value, which is the issued or redeemable amount. This type of stock appeals to investors who desire stability and predictability in future dividends.

Common stock

Common stock represents the ownership of a company and can be in various classes, such as A and B. These stockholders typically possess voting rights for the company’s decisions, such as electing a board of directors and voting on policies. Common stockholders can earn more than preferred stockholders, but are also the lowest priority claim on a company’s assets if there is a default. In the event of a company liquidating its assets, common stockholders will get paid after preferred stockholders, and usually, there is very little value left in the company at this stage.

Additional paid-in capital

This is the excess amount of the par value that investors pay for a stock. It represents the premium that an investor would be willing to pay. Let’s assume an investor purchased a single share for $15.30, although the underlying stock has a par value of $1/share (the price when issued). This would mean common stock would rise by $1 and paid in capital would increase by $14.30 on the statement of shareholders’ equity.

Retained earnings

Retained earnings are the total accumulated earnings of a company after it has distributed dividends to its shareholders. It is essentially the net income that a company has reinvested back into the company (rather than returned to shareholders). This could be investing in expansion through the purchase of property, plant and equipment, possibly mergers or to pay its debts. A company that has been consistently profitable will typically have a large retained earnings account.

Treasury stock

When a company repurchases its issued stock, it reports it under treasury stock. Companies often repurchase stock to repatriate capital to shareholders, and it can be a signal that the management team believe the stock is undervalued by the market.

If a stock price has been impacted by external events that may not be directly relevant to the company (or the markets have overestimated the downside of any negative news) this may create an opportunity to buy back shares at a lower level than the stock usually trades at. The shareholders’ equity will decrease by the amount used to repurchase treasury stock.

Accumulated other comprehensive income (loss)

This accounting line reports the gains and losses on the revaluation of certain assets or liabilities, known as “unrealized gains or losses”. Often when the gain or loss is crystallized into cash, the amount is removed from the other comprehensive income (loss) account and put through the income statement.

Non-Controlling Interests

This is also known as minority interests and is the share of ownership in a subsidiary’s equity that is not owned or controlled by the parent company. The non-controlling shareholders own less than 50% of the outstanding shares and do not have control of the company’s decisions.

How Do You Create A Statement Of Shareholder Equity?

To create a statement of shareholder equity, an analyst would need to report the changes in the value of shareholders’ equity or ownership interest in a company from the beginning of an accounting period to the end of it. This involves detailing the different line items within the statement, such as preferred stock, common stock, additional paid-in capital, retained earnings, treasury stock, accumulated other comprehensive income (loss), and non-controlling interests.

Here is an example of a statement of shareholder equity:

This is taken from Apple’s 2024 10K filing which can be found using Felix and retrieved quickly using the Felix section search on the left of the screen.

Investors can see the shareholders’ equity at the beginning of each period and the movements of capital through the 12-month period, showing common stock, share-based compensation, retained earnings and other comprehensive income.

Positive vs. Negative Shareholder Equity

Positive shareholder equity indicates that a company’s assets exceed its liabilities, which is generally a sign of good financial health at a company. Negative shareholder equity, on the other hand, means that a company’s liabilities exceed its assets, which can be a red flag for investors and may indicate financial distress.

When looking at Apple’s Statement of Shareholders’ Equity, we can see that although the shareholders’ equity is positive (i.e. more assets than liabilities) it has negative retained earnings, which is a little unusual. Further analysis of this statement will help discover that Apple has a large (and planned) share buyback program underway.

How Is Shareholder Equity Calculated?

Shareholder equity is calculated by subtracting total liabilities from total assets. This can be represented by the formula:

Shareholder Equity = Total Assets - Total Liabilities

This calculation provides a snapshot of the company’s financial health and its net worth.

Statement of Owner’s Equity vs. Cash Flow Statement

The statement of owner’s equity focuses on the changes in equity accounts over a specific period, providing detailed information about capital raising, repatriating, and other items that directly impact equity accounts. In contrast, the company’s cash flow statement provides information about the cash inflows and outflows of a company, detailing how cash is generated and used during a specific period.

Conclusion

Shareholders’ equity represents the ownership interest of shareholders in a company. It is calculated by subtracting total liabilities from total assets, providing a snapshot of the company’s financial health and net worth.

The statement of shareholders’ equity reports the changes in the value of shareholders’ equity from the beginning of an accounting period to the end of it. This document gives investors more transparency about the changes in equity accounts and reports on the business activities that contribute to the movement in the value of shareholders’ equity.

A statement of shareholder equity is primarily used by investors and analysts. It provides detailed information about the changes in the value of shareholders’ equity or ownership interest in a company over a specific accounting period.

The statement of shareholders’ equity gives investors a much better understanding of how the individual equity accounts have changed during the period. The income statement gives a very good understanding of the changes in retained earnings, but the statement of shareholders’ equity gives us the details of capital raising and repatriating capital, and other items that hit the equity accounts directly (which aren’t included in the income statement).

Additional Resources

Preferred Stock
Common Stock
Retained Earnings
Treasury Stock
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