2.3 Equities

Introduction

Equities is the owner’s claim of the company assets after minus out the liabilities. Revenue that reinvested back into the company will be part into equity as well.

Component of Equities

Equities can be separated into four large components as follows:

2.3.1               Capital Contributed by the owners

This is the amount contributed by the owner through common shares. Usually capital contributed is multiply of the par value of the common share par value by number of share outstanding.

2.3.2               Preferred Shares

Preferred shares work like bonds but have lower priority to claim the company assets than bond when the company dissolve. Preferred share promised to pay the owner a certain percentage of dividends annually. Only non-redeemable can be classified as equity. On the other hand, the redeemable preferred shared are classified as liability.

2.3.3               Treasury Shares

Shares that had brought back by the company and not cancelled are called the treasury shares. Treasury shares does not had voting right and reduce the outstanding shares of the company.

2.3.4               Retained earning

Every year the management can decide to distribute the profit after tax to owners through dividend or reinvests it back into the company. The reinvested amount are called the retained earnings and can accumulated through the years.

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2.0 Balance Sheet

Introduction

For a public listed company the balance sheet required to be disclosed annually in their annual report. Balance sheet is also known as statement of financial position.

Balance sheet has three components as follows:

2.1) Assets

2.2) Liabilities

2.3) Equities

Balance sheet basically got its name because it balance these three components. The equations for balance sheet are as follows:

Asset = Liability + Equity

There is two ways of balance sheet presentation, classified balance sheet and liquidity based presentation.

Classified Balance Sheet

This is the most common type of balance sheet presentation. For both IFRS and US GAPP, the assets and liabilities had to separate into current and non-current for classified balance sheet.

Below shows classified balance sheet of FIAMMA (6939) for the financial year ending 30 September 2015.

Liquidity Base Presentation

Liquidity base presentation presents the assets and liabilities in order of their liquidity (the most liquidity will presented at the top). This presentation is provides reliable and more relevant presentation. This presentation is commonly uses in bank. For IFRS company report liquidity base presentation balance sheet does not required to classified their assets and liabilities into current and non current while company report under US GAAP still required.

Below shows liquidity base presentation balance sheet of Maybank (1155) for the year ending 31 December 2014.

Analysts’ point of view

Some analysts use vertical common sized analysis for the balance sheet to compared different company of the different size which operated in the same industries.

Vertical common sized analysis basically convert the each asset of the company into weight of total asset and each liability and equity of the company into weight of total liabilities and equities.

Table below shows example of vertical common size analysis.

Balance sheet of company A and company B

($Thousand)	A	B
Asset
Current Asset
Cash and equivalent	10,000	200
Account receivable	8,000	500
Inventory	1,000	1,000
Total Current Asset	19,000	1,700
Property, Plant and Equipment	750	750
Goodwills	-	100
Total Asset	19,750	2,550
Liability and Equity
Current Liability
Trade Payable	1,000	100
Total Current Liabilities	1,000	100
Long Term Borrowing	5,000	200
Total Liabilities	6,000	300
Total Equity	13,750	2,250
Total Liabilities and Equity	19,750	2,550

Common Size Vertical Balance Sheet

Percentage %	A	B
Asset
Current Asset
Cash and equivalent	50.63%	7.84%
Account receivable	40.51%	19.61%
Inventory	5.06%	39.22%
Total Current Asset	96.20%	66.67%
Property, Plant and Equipment	3.80%	29.41%
Goodwills	0%	3.92%
Total Asset	100%	100%
Liability and Equity
Current Liability
Trade Payable	5.06%	3.92%
Total Current Liabilities	5.06%	3.92%
Long Term Borrowing	25.32%	7.84%
Total Liabilities	30.38%	11.76%
Total Equity	69.62%	88.82%
Total Liabilities and Equity	100%	100%

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2.2 Liabilities

Introduction

Liabilities are the obligations of a company from past events which expected to have outflow of economic benefits from the company in the future.  There are two main types of liabilities:

2.1.1)           Current Liability

2.1.2)           Non Current Liability

2.2.1               Current Liabilities

Current liabilities are the liabilities held by the company which has obligations to be settled within one year or one business cycle, whichever is greater. However IFRS allowed operating items such as payable to employees, trade payable and etc to be classified as current liabilities even though they will be settled more than one years. Current liabilities are as follows:

2.2.1.1                   Trade Payable

2.2.1.2                   Short Term Borrowing

2.2.1.3                   Current Tax Payable

2.2.2               Non Current Liabilities

Non current liabilities are the liabilities not expected to be settled within one year or one business cycle, whichever is greater. Non current liabilities included financial liabilities that provide financing at long term basis. Non Current liabilities are as follows:

2.2.2.1                   Long Term Borrowing

2.2.2.2                   Defer Tax Liabilities

2.2.2.3                   Financial Lease Obligations

2.2.2.4                   Retire Benefit Obligations

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2.1 Assets

Introduction

Assets are resources control by company which has future economic benefit. Asset can be found in the balanced sheet of the company. There are two main type of assets:

2.1.1)           Current Asset

2.1.2)           Non Current Asset

2.1.1               Current Assets

Current assets are the assets held primary for trading or expected to be sold or converted into cash within one year or one business cycle, whichever is greater. Current asset are as follows:

2.1.1.1                   Inventories

2.1.1.2                   Trade receivable

2.1.1.3                   Asset available for sales

2.1.1.4                   Cash and bank balance

2.1.1.5                   Defer tax asset

2.1.2               Non Current Assets

Non current assets are the assets not expected to be sold within one year or one business cycle, whichever is greater. Non current assets also known as long term assets or long lived assets. Non current assets are as follows:

2.1.2.1                   Property, plant and equipment

2.1.2.2                   Investment properties

2.1.2.3                   Investment in associate

2.1.2.4                   Goodwill and intangible asset

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