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Shareholder Equity & Retained Earnings2:36 with Michael Watson
Shareholder Equity & Retained Earnings
I'm just going to speak at a very high level here on the stock component 0:00 of the equity section, as it gets a little advanced. 0:04 The equity section of a balance sheet shows the different types of stock 0:08 the company has issued and authorized, as well as retained earnings. 0:11 We'll elaborate more on what retained earnings are later in this video. 0:17 There can be a lot of detail in this equity section that shows different types 0:21 of common shares, par values, paid in capital, and treasury stock. 0:25 We're not going to get into the details of that. 0:31 Just know that in simplistic terms, 0:33 this represents the share value of a stocks when they're issued. 0:36 For larger, publicly listed companies, 0:41 you might see a lot of different stock lines here. 0:43 In startups and smaller companies, 0:46 you'll likely see different line items for series A, series B, etc. 0:48 Then, there is another line item in the equity section for retained earnings. 0:54 Retained earnings are the amount of net income the company has generated 0:59 since inception that has been reinvested in the business. 1:03 So again, simple examples at a high level. 1:08 But let's say the company has generated a net profit of $100,000 this year. 1:11 We decided to reinvest all of that money in the business, so 1:16 our retained earnings would be increased by $100,000 this year. 1:20 If we had lost $100,000 then our retained earnings would decrease. 1:26 And if we've never generated a profit, this would be an accumulated loss or 1:31 accumulated deficit instead of retained earnings. 1:36 If the company had issued some dividends to shareholders, let's say $20,000 1:39 in this year, then our retained earnings would only go up by $80,000. 1:44 So, when you sum up all these rows, that gets you total shareholder's equity or 1:49 the book value of the equity of the business. 1:55 If someone asks you how much a business is worth, 1:59 that's a potentially difficult question to answer. 2:01 It's a question about value which can be nuanced and subjective. 2:04 What is not nuanced or subjective. 2:09 And a potentially good response if you're not wanting to go down the path of a long 2:11 conversation is to use the book value of the business as a response. 2:15 So if someone asked you, hey, what's the value of this privately held business? 2:20 One potential answer to the question is to look at the balance sheet, find the total 2:25 shareholder equity line, and tell them the book value of this business is XYZ. 2:30
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