Calculating Common Equity: A Comprehensive Guide

Common equity is found on the balance sheet under stockholders' equity.

Common equity reflects corporate ownership allotted to common shareholders. Owners of common shares can exercise voting rights, can receive dividends and can benefit from an increase in share price. Common equity is important as a tool for investors to calculate financial ratios, such as return on common equity,which indicates how profitable the company is.

Step 1

Multiply the common stock outstanding by the par value of the stock to determine common stock par outstanding. Par value is a nominal amount that bears no relationship to the actual price of the stock. Companies disclose this information on their balance sheet. For example, a company has 100,000 shares at $1 par value has a $100,000 par value of stock.

Step 2

Determine the capital surplus for common stock. Usually this is under an account called Additional Paid-in Capital (APIC) on the balance sheet. APIC represents amount of money collected by the company when it issued the stock, minus the par value of the stock. In the example, a firm has APIC - Common Stock of $24.9 million, meaning it issued $25 million in common stock, of which $100,000 was par.

Step 3

Determine the retained earnings of the company, which are the accumulated profits since inception. Companies disclose retained earnings on their balance sheet under the Stockholders' Equity section. In the example, the firm has $2 million of retained earnings.

Step 4

Add the common stock par value plus the capital surplus and the retained earnings to determine common equity. In our example, $100,000 plus $24.9 million plus $2 million equals $27 million of common equity.

Tip

The actual market capitalization of a company is the number of shares times the current price per share. Prices, and thus market cap, constantly fluctuate. The market cap can greatly differ from the book value of common equity.

Warning

Sometimes, companies buy up their common stock shares in the open market to reduce the number of outstanding shares. This has the effect of improving certain financial ratios, such as earnings per share. However, don't confuse this kind of window dressing with an actual improvement in performance.