Capital is a crucial element in the growth and success of any business. The more capital a company possesses, the greater its potential and the smoother its operations. In the realm of business finance, capital structure can be classified into two categories: debt capital and equity capital. This article will provide a comprehensive understanding of equity and explore the advantages of equity financing.
What is Equity?
Equity refers to the capital owned by business owners, members of joint ventures, or shareholders in joint-stock companies. It represents the difference between a company’s assets and liabilities on its balance sheet. Additionally, the market value of equity is determined by the current value of the stock (if publicly traded) or by investors or valuation specialists. Equity is also known as shareholder/owner/shareholder equity or net worth.
Components of Equity
Equity, as reflected in an enterprise’s income statement, comprises several components. These include:
- Shareholders’ equity
- Equity surplus
- Treasury securities
- Undistributed profit
- Fund for financial provision
- Salary and benefits
- Fund for development
- Additional funds under equity…
It’s important to note that only joint-stock companies can utilize equity and treasury shares from the aforementioned sources.
The share premium refers to the difference between the par value of shares and the issue price of shares, as well as the difference between the redemption price and the re-issuance price of treasury shares. For example, if Company A has a par value of $100 per share and goes public at a share price of $200 with 150 shares, the share premium would amount to $15,000.
Treasury shares are shares repurchased by a joint-stock company without cancellation.
Owner’s Equity in Various Business Types
Equity is derived from different sources depending on the type of business. In Vietnam, equity sources can be categorized as follows:
- State-owned enterprises: The state provides or invests operating capital, making it the equity owner.
- Limited liability companies: Capital is formed through contributions from participating members, who become the owners.
- Joint-stock companies: Shareholders contribute equity, making them the capital owners.
- Partnerships: General partners, who contribute capital, are considered capital owners.
- Private businesses: The business owner provides the capital, making them the owner. The owner is fully accountable for all assets.
- Joint venture enterprises: Equity is contributed by organizations and individuals involved in the joint venture, making them the capital owners.
Throughout a business’s lifespan, equity may be supplemented by earned business profits, differences in asset revaluation, or additional funds.
Personal Equity (Net Worth)
Each individual has their own personal net worth, which can be calculated based on various assets and liabilities. Personal assets commonly include cash, real estate, investments, furniture and home appliances, and vehicles. Liabilities can encompass credit card debt, lines of credit, unpaid bills, student loans, and bank mortgages.
Advantages of Equity Financing
Equity financing offers several advantages for businesses:
Less burden: Unlike debt financing, equity financing does not require repayment of a credit line. Companies are not obligated to make monthly loan payments, which is especially beneficial if a company is not immediately profitable. This allows for increased investment in business expansion.
Credit problems resolved: If a company lacks creditworthiness due to a poor credit history or a lack of financial track record, equity financing may be a more suitable option than debt financing.
Learn from partners: Equity financing provides opportunities for informal partnerships with knowledgeable and experienced individuals. These partners may have valuable connections that can enhance a company’s knowledge and business network.
However, it is essential to consider some downsides associated with equity financing:
Profit sharing: Shareholders expect a share of the company’s profits. While this may entail sharing the benefits of their financial support and business expertise, it is an important consideration.
Loss of control: By opting for equity financing, ownership of the firm is shared with investors or shareholders, resulting in a loss of sole control.
Possible conflicts: Shared ownership and collaboration can lead to tension and conflicts, especially if there are differences in management styles and business approaches. Careful consideration is required in such cases.
In conclusion, this article has provided a comprehensive understanding of equity and explored the advantages of equity financing. If you need further information, Teho.info is here to assist you. Thank you for reading our article!