1 00:00:00,726 --> 00:00:04,410 I'm just going to speak at a very high level here on the stock component 2 00:00:04,410 --> 00:00:07,100 of the equity section, as it gets a little advanced. 3 00:00:08,110 --> 00:00:11,980 The equity section of a balance sheet shows the different types of stock 4 00:00:11,980 --> 00:00:17,050 the company has issued and authorized, as well as retained earnings. 5 00:00:17,050 --> 00:00:20,630 We'll elaborate more on what retained earnings are later in this video. 6 00:00:21,840 --> 00:00:25,820 There can be a lot of detail in this equity section that shows different types 7 00:00:25,820 --> 00:00:31,195 of common shares, par values, paid in capital, and treasury stock. 8 00:00:31,195 --> 00:00:33,505 We're not going to get into the details of that. 9 00:00:33,505 --> 00:00:36,575 Just know that in simplistic terms, 10 00:00:36,575 --> 00:00:41,560 this represents the share value of a stocks when they're issued. 11 00:00:41,560 --> 00:00:43,530 For larger, publicly listed companies, 12 00:00:43,530 --> 00:00:45,640 you might see a lot of different stock lines here. 13 00:00:46,640 --> 00:00:48,620 In startups and smaller companies, 14 00:00:48,620 --> 00:00:52,860 you'll likely see different line items for series A, series B, etc. 15 00:00:54,075 --> 00:00:59,575 Then, there is another line item in the equity section for retained earnings. 16 00:00:59,575 --> 00:01:03,625 Retained earnings are the amount of net income the company has generated 17 00:01:03,625 --> 00:01:08,225 since inception that has been reinvested in the business. 18 00:01:08,225 --> 00:01:11,555 So again, simple examples at a high level. 19 00:01:11,555 --> 00:01:16,890 But let's say the company has generated a net profit of \$100,000 this year. 20 00:01:16,890 --> 00:01:20,720 We decided to reinvest all of that money in the business, so 21 00:01:20,720 --> 00:01:26,020 our retained earnings would be increased by \$100,000 this year. 22 00:01:26,020 --> 00:01:31,060 If we had lost \$100,000 then our retained earnings would decrease. 23 00:01:31,060 --> 00:01:36,120 And if we've never generated a profit, this would be an accumulated loss or 24 00:01:36,120 --> 00:01:39,400 accumulated deficit instead of retained earnings. 25 00:01:39,400 --> 00:01:44,694 If the company had issued some dividends to shareholders, let's say \$20,000 26 00:01:44,694 --> 00:01:49,494 in this year, then our retained earnings would only go up by \$80,000. 27 00:01:49,494 --> 00:01:55,139 So, when you sum up all these rows, that gets you total shareholder's equity or 28 00:01:55,139 --> 00:01:59,130 the book value of the equity of the business. 29 00:01:59,130 --> 00:02:01,900 If someone asks you how much a business is worth, 30 00:02:01,900 --> 00:02:04,790 that's a potentially difficult question to answer. 31 00:02:04,790 --> 00:02:09,370 It's a question about value which can be nuanced and subjective. 32 00:02:09,370 --> 00:02:11,950 What is not nuanced or subjective. 33 00:02:11,950 --> 00:02:15,900 And a potentially good response if you're not wanting to go down the path of a long 34 00:02:15,900 --> 00:02:20,630 conversation is to use the book value of the business as a response. 35 00:02:20,630 --> 00:02:25,700 So if someone asked you, hey, what's the value of this privately held business? 36 00:02:25,700 --> 00:02:30,590 One potential answer to the question is to look at the balance sheet, find the total 37 00:02:30,590 --> 00:02:35,790 shareholder equity line, and tell them the book value of this business is XYZ.