Shareholder Fund Meaning Formula Example Vs Equity

Shareholder Fund Meaning

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Shareholder Fund (wallstreetmojo.com)

Also called Shareholder EquityShareholder EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more, SF is computed by deducting a firm’s overall liabilities from its total assets. It is recorded on the liabilities Liabilities Liability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read moreside of the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more. It typically includes share capital (common and preferred stock), retained earnings, and other unrealized gains/lossesUnrealized Gains/lossesUnrealized Gains or Losses refer to the increase or decrease respectively in the paper value of the company’s different assets, even when these assets are not yet sold. Once the assets are sold, the company realizes the gains or losses resulting from such disposal.read more.

Key Takeaways

A shareholder Fund is the residual value of a company’s asset after all its liabilities are met. It is used with other metrics to determine the company’s financial health.It is calculated by subtracting the total liabilities from total assets. Both long-term and short-term assets and liabilities are considered while computing it. It gives shareholders an idea of the expected amount to be received in case of business insolvency, thus deciding their fair share in the company. Shareholder Fund is of two types, i.e., positive (assets surpass liabilities) and negative (liabilities exceed assets).

Shareholder Fund Explained

A shareholder Fund is money owed, and shareholders can claim on the dissolution of a firm after all dues are cleared. Therefore, it is also referred to as owners’ equity. It appears under the Equity & Liabilities section of a company’s balance sheet and provides useful insight into its overall financial condition.

SF may be positive or negative. A positive SF indicates that the total assets in an enterprise surpass its liabilities. At the same time, negative SF displays that its total liabilities outsize its assets. It means that a firm with a positive SF has assets that can easily cover its liabilities, leaving a greater surplus for its shareholders in the case of its winding up.

On the contrary, with a negative SF, shareholders would be left with nothing after settling liabilities with the available assets. Therefore, investors analyze the balance sheet to ascertain the SF amount to make investment decisions. They favor businesses with positive SF to relish low-risk financial transactions.

However, SF is usually used in conjunction with other financial ratiosFinancial RatiosFinancial ratios are indications of a company’s financial performance. There are several forms of financial ratios that indicate the company’s results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more to discern the general financial stability of a company. Since SF reveals the owners’ investment in the company, it is used to calculate an important financial ratio, return on equityReturn On EquityReturn on Equity (ROE) represents financial performance of a company. It is calculated as the net income divided by the shareholders equity. ROE signifies the efficiency in which the company is using assets to make profit.read more (ROE), that weighs up the total capital investment against the acquired returns for a particular period. It is an important indicator of profitabilityProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more and efficiency.

Shareholder Fund Formula

There are two formulas to calculate SF.

Formula #1

This is the basic formula for SF in accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements.read more. The balance sheet displays all information for calculating it.

Shareholder Fund = Total assets – Total liabilities

First, pinpoint the total number of assets on the balance sheet. Next, go to the other listing and obtain the aggregate of all liabilities. Subtract liabilities from assets to receive the present amount of shareholder funds.

Here, total assets incorporate both current and noncurrent assets. Current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more are convertible to cash as early as a year, such as stock and accounts receivable. In contrast, non-current assets Non-current Assets Non-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company’s investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.read more are long-term assets that take more than a year to encash, such as machinery, vehicles, trademarks, etc.

Similarly, total liabilities comprise both short-term and long-term liabilities. Current liabilitiesCurrent LiabilitiesCurrent liabilities are the company’s obligations expected to get paid within one year and are calculated by adding the value of trade payables, accrued expenses, notes payable, short-term loans, prepaid revenues, and the current portion of the long-term loans.read more are payments that must be dispersed within a year, such as salaries, taxes payable, etc. In contrast, non-current liabilitiesNon-current LiabilitiesThe most common examples of Non-Current Liabilities are debentures, bond payables, deferred tax liabilities etc. Non-Current Liabilities are the payables or obligations of an entity which might not be settled within twelve months of accounting such transactions. read more are obligations with payment dates longer than one year, such as leases and pension obligations.

Thus, it equates to:

Shareholder Fund = Total assets (Current + non-current assets) – Total liabilities (Current + non-current liabilities)

Formula #2

SF is the total of a company’s share capital and other accumulated earnings as displayed on the liabilities side of its balance sheet.

Shareholder Fund = Paid-in share capital + Retained earnings + Other accumulated incomes/losses + Minority interest – Treasury stocks

Share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company’s initial public offerings, common shares or preference stocks to the public. It appears as the owner’s or shareholders’ equity on the corporate balance sheet’s liability side.read more comprises both common and preferred sharesPreferred SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more. Paid-in share capital includes funds raised by a company through the issue of common and preferred stocks. Preferred stockholders possess preferential rights. They are entitled to payments (dividend and redemption) before common stockholders.

Retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more are profits that are not paid out as dividends and amassed by a company since its inception. It is calculated by adding net income for the year (less dividend paid during the current year) to the opening balance of retained earnings at the beginning of the year.

Other accumulated incomes or losses include unrealized cash flows from certain investments, pension plans, hedging activities, etc. Since these cash flows are unrealized, they are not recorded in the income statement.

Minority interestMinority InterestMinority interest is the investors’ stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.read more is included in the consolidated balance sheet of a parent company. It represents the amount of equity not held by the parent company in its subsidiary.

Finally, the treasury stocksTreasury StocksTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. read more are shares bought back or repurchased by the company’s shareholders. As a result, it reduces the shareholder capital held and hence must be deducted while calculating SF.

Shareholder Fund Calculation Example

Let’s take the details of assets and liabilities from XYZ company’s balance sheet to calculate SF.

With the above information, SF can be calculated as follows:

Total assets = Current assets + Non-current assets

= 300,000 + 1,400,000

= 1,700,000

Total liabilities = Current liabilities + Non-current liabilities

= 100,000 + 900,000

= 1,000,000

= 1,700,000-1,000,000

= 700,000

Using Formula 2

Alternatively, the liabilities side of the balance sheet also presents the following information:

From the above details, SF can be calculated as follows:

Shareholder Fund = Total paid-in share capital + Retained earnings – Other accumulated losses + Minority interest – Treasury stocks

= 700,000 + 100,000 – 150,000 + 100,000 – 50,000

Therefore, using both formulas, the amount of shareholder funds in XYZ company comes out to be $700,000.

Real-Life Example

The world’s largest dairy exporter currently has a shareholder fund with $NZ 493 million ($356 million). A recent Bloomberg news report mentions Fonterra Cooperative Group’s plan to cap or buy back the listed Fonterra shareholder’s fund. This step strives to hinder possible endangerment to the farmer control and sustain a stable milk supply chain in New Zealand.