05-21-2015, 11:21 PM
(This post was last modified: 05-22-2015, 09:13 AM by Dividend Watcher.)
Dan, it's difficult to write it out. I much prefer using a whiteboard and juggling numbers that way since you can talk your way through it. Perhaps putting the 2 equations on paper and writing out different scenarios would help you comprehend how things are interrelated.
Keep in mind the concept of "equity" is a little intangible. You can't just walk into a bank and ask to see the equity statement. Sure you can see the bank statement or the loan statement but that's only a part of the story. Nor does the present depreciated value of an asset give you the true worth of that asset. Using our FedEx truck example in the depreciation thread, I doubt FedEx would sell you a 4-year-old, $50,000 truck with only 5,000 miles on it (it was used for special purposes only perhaps) for $3,000 just because that was the depreciated value of it. I'm sure it happens but I'd be pissed if a company I owned did that on a routine basis.
Par value & additional paid in capital (1 & 2) really do not change nor affect it much except newer companies and perhaps REITs since they issue shares every so often. Par value especially is a minimal value. Most balance sheets I've seen list equity par value around $0.01/share.
Accumulated other income/deficit (3) really shouldn't change much but you should look at where it comes from for a couple years; it should be in the notes. If unfunded pension/post-retirement benefits make up a big portion of it, then you may want to watch that a little closer although management always seems to juggle the financials enough that the company is not forced to take drastic action. Other than automakers and airlines, when was the last time you heard of pension obligations pushing a company to the brink of bankruptcy?
The biggie is Retained Earnings since it is affected by day-to-day transactions on a constant basis.
I keep going back and forth on how much importance I really want to place on equity and RoE and just want it to be positive. When I was researching CMP, the first 4 years of existence after the spinoff had negative equity yet they kept up the dividend growth.
Hope that helps.
Keep in mind the concept of "equity" is a little intangible. You can't just walk into a bank and ask to see the equity statement. Sure you can see the bank statement or the loan statement but that's only a part of the story. Nor does the present depreciated value of an asset give you the true worth of that asset. Using our FedEx truck example in the depreciation thread, I doubt FedEx would sell you a 4-year-old, $50,000 truck with only 5,000 miles on it (it was used for special purposes only perhaps) for $3,000 just because that was the depreciated value of it. I'm sure it happens but I'd be pissed if a company I owned did that on a routine basis.
Par value & additional paid in capital (1 & 2) really do not change nor affect it much except newer companies and perhaps REITs since they issue shares every so often. Par value especially is a minimal value. Most balance sheets I've seen list equity par value around $0.01/share.
Accumulated other income/deficit (3) really shouldn't change much but you should look at where it comes from for a couple years; it should be in the notes. If unfunded pension/post-retirement benefits make up a big portion of it, then you may want to watch that a little closer although management always seems to juggle the financials enough that the company is not forced to take drastic action. Other than automakers and airlines, when was the last time you heard of pension obligations pushing a company to the brink of bankruptcy?
The biggie is Retained Earnings since it is affected by day-to-day transactions on a constant basis.
I keep going back and forth on how much importance I really want to place on equity and RoE and just want it to be positive. When I was researching CMP, the first 4 years of existence after the spinoff had negative equity yet they kept up the dividend growth.
Hope that helps.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan