Investing 101: Balance Sheet – Stockholders Equity
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
More losses in the stock market are caused by not knowing how to evaluate a company's fundamentals. When it comes to analyzing a company you need to know what is on their balance sheet. I'll walk you through some of the basics, and give you an example of how this relates to your finances to make things easier. Given that books have been written on how to read a balance sheet, I'll try to keep this simple. I've already covered the assets and liabilities part of the balance sheet in a few other posts. This post will explain the last section called stockholders equity.
You can find the company's balance sheet on many finance web sites like Motley Fool, Yahoo Finance, Google Finance, etc. The balance sheet is usually broken into three parts, assets, liabilities, and stockholders equity. (Keep in mind when you see numbers on a balance sheet they are normally quoted “all numbers in thousands or millions”. This is how $10,300,000 or $10,300 can actually mean $10.3 billion, don't forget to add those 3 or 6 zeros!)
When I look at the stockholders equity portion of the balance sheet I generally look at retained earnings, treasury stock, and total stockholders equity. In this example we'll look at Red Robin Gourmet Burgers (NASDAQ: RRGB).
The short definition of retained earnings is what the company made from earnings minus dividends. This figure can help you figure out a few things. First, are the company's earnings outpacing their dividends? If they are, then retained earnings should increase, if not then retained earnings would decrease. Second, you can also use retained earnings to figure out if a company can maintain its dividend. The higher the retained earnings number the safer the dividend. Third, you can get an idea of a company's growth rate. In Red Robin's case, they show $179.6 million in retained earnings 4 quarters ago, and $197.3 million in retained earnings last quarter. From this we can figure out the growth in earnings. You take the $197.3 - $179.6 = $17.7 million. Then divide this $17.7 million into the starting number of $179.6 million and you can see they grew retained earnings by 9.85% in the last year.
Treasury stock is a line item that can give you an idea if the company is expanding or shrinking its share count. If the number is negative you know that the company is buying back its shares. If the number is positive you know that new shares are being issued. This is important because most companies are tracked and valued based on earnings per share. Thus, the more shares the harder it is for the company to grow earnings per share, and the reverse is true as well. Looking at Red Robin, we see a ($80,985), this tells me that the company has bought back $80.985 million of its shares as of the most recent quarter. This is a positive for Red Robin investors because even if earnings were to stay flat the earnings per share would rise.
Total Stockholders Equity
If you hear someone quote the book value of a company, as a way to value the stock, this is what they are referring to. Stockholders equity is total assets minus total liabilities. In your personal finances this would be referred to as net worth. Generally speaking, total stockholders equity is most useful when compared to something else. The most common ratio is debt-to-equity. Debt-to-equity measures how much long term debt the company has compared to their equity. In Red Robin's case they have $146.9 million in long term debt and $292.6 million in total stockholders equity. This gives them a ratio of 0.50. Another way to say this is their debt is 50% of their net worth (stockholders equity). Generally speaking, the more equity and less debt the safer the company. We'll compare Red Robin to two other companies in the restaurant industry so you can see how varied this debt-to-equity ratio can be.
Buffalo Wild Wings (NASDAQ: BWLD) - $0 long term debt – 0.00 debt-to-equity ratio – 0% debt
P. F. Chang's China Bistro (NASDAQ: PFCB) - $112.16 long term debt – 0.36 debt-to-equity ratio – 36% debt
Now that you know more about reading a company's balance sheet you can make more informed investment decisions. If you have any questions or comments, please leave them in the below comments section.
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