Equity is a central concept in the financing of companies. It refers to that part of the capital that is contributed by the owners of the company and remains in the company in the long term. In contrast, the Debt capitalwhich is provided by third parties and must be repaid with interest.
Equity provides a solid basis for long-term investment and growth. It provides security for creditors and investors and strengthens confidence in the company.
Composition of equity
If you are an investor dealing with the topic of equity, it is important to understand the composition of a company's equity. This is because the structure of the equity gives you an insight into the financial strength and risk of the company.
In principle, equity is made up of subscribed capital and the capital reserve. Subscribed capital is the money paid into the company by shareholders. The capital reserve, on the other hand, arises from capital increases or from the sale of shares with a higher value than the nominal value.
There are also other components of equity, such as retained earnings or reserves. Retained earnings arise from the company's retained profits, while reserves are often used to hedge risks and finance investments.
The composition of equity can change over time. For example, companies can buy back shares or issue new shares in order to increase or decrease equity. It is therefore important to regularly review the structure of equity in order to be able to react to changes.
Key figures for the valuation of equity
There are various ratios used to measure the importance of equity for a company's financial strength. One important key figure is the Equity ratiowhich indicates the ratio of equity to the company's total capital. A high equity ratio is a sign of a solid financial position and low debt. As a rule of thumb, companies should have an equity ratio of at least 30 %.
Another key figure is the Return on equitywhich measures the profitability of equity. A high return on equity means that the company generates good profits and uses the equity invested profitably.
Build up and increase equity
There are various ways to build up or increase a company's equity.
One option is the conversion of debt into equity, as is the case when issuing convertible bonds. In this case, creditors have the right to convert their claims into shares. This reduces debt capital and increases equity. However, this method is not always the best choice as it can lead to control of the company being split and additional shareholders coming into play.
It is also possible to carry out capital increases by issuing new shares. This can help to increase equity quickly and prepare the company for new challenges.
However, the issue of new shares often leads to a dilution of the shares held by existing shareholders. For example, if a company decides to issue 10 % new shares, this means that the shares of existing shareholders are diluted by 10 % and their influence in the company is reduced.
One example of a successful capital increase is Deutsche Bank in 2017. The bank issued 687.5 million new shares to increase its capital and strengthen its balance sheet. The capital increase was a great success and brought the bank a profit of 8 billion euros.
Another approach is to retain profits in the company and build up reserves. This is a very conservative and safe method of increasing equity, as it prepares the company for unexpected events and crises.
For example, a capital increase may be required to make sudden investments or to bridge financial bottlenecks. In such cases, reserves can serve as a cushion and support the company.
Overall, there are various ways to build up or increase a company's equity. The choice of the right method depends on many factors, such as the financial situation of the company, the needs of the shareholders and the strategic direction of the company. It is important to carefully weigh up the advantages and disadvantages of each method and make a decision that takes into account the interests of all parties involved.
Which key figures you should pay attention to as an investor in addition to equity capital
As an investor, you should not only rely on equity, but also pay attention to other key figures in order to make well-founded decisions. These include, for example, the return on equity, which indicates the profit in relation to the equity capital employed, or the price/earnings ratio, which represents the relationship between the current share price and the earnings per share.
Another important factor is the company's liquidity, which results from the ratio of current liabilities to current assets. Here it is important to check whether the company has sufficient liquidity to meet its current obligations.
You should also analyze the company's growth potential, for example by looking at sales and profit trends in recent years as well as its market position and competitive situation. All these key figures can help you as an investor to get a comprehensive picture of a company and make decisions on a solid basis.
Conclusion: Equity - what it is and why it is important
In summary, it can be said that equity plays a central role in the financing of companies. It also provides a solid basis for long-term investments and growth. It is made up of subscribed capital and the capital reserve and can also include retained earnings and reserves.
The structure of equity provides an insight into the financial strength and risk of a company. To measure the importance of equity, there are various key figures such as the equity ratio and return on equity.
Equity also plays an important role in the valuation of a company, as it is an indicator of financial strength and stability. There are various ways to increase equity, such as issuing new shares or converting debt into equity.
It is also important that you use not only equity but also other relevant key figures to analyze and evaluate your investment decisions.