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How to Evaluate Using the Stockholders' Equity

Original post by Ryan Menezes of Demand Media

The most direct way to determine a company's performance is to look at its earnings statement. This statement lists the firm's revenues and expenditures and specifies its net income for the period. Alternatively, you can calculate the company's income using the amount of equity that the stockholders own. The earnings that the company distributes among its shareholders are related to this value and to the value of each investor's dividends.

Contents

Step 1

Divide an investor's dividends by the equity the investor has contributed to the firm. For example, if a stockholder who has invested $200 in a company receives $15 in dividends, divide $15 by $200, giving 0.125.

Step 2

Multiply the ratio by the combined value of all the stockholders' equity. For example if stockholders have a total of $150,000 in equity, multiply 0.125 by $150,000, giving $18,750.

Step 3

Add to this sum the value of any preferred dividends that the company paid to preferred stockholders. For example, if the company issues preferred stockholders $5,000 in dividends, add $5,000 to $18,750, giving $23,750. This is the company's net income for the period.


                   

Resources

References

  • "Cornerstones of Financial & Managerial Accounting..."; Jay S. Rich et. al.; 2009
  • "Principles of Accounting"; Belverd E. Needles; 2010

About the Author

Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.


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