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10. Long-Term Liabilities and Shareholders' Equity
Long-term liabilities and shareholders' equity are the two remaining items in our balance sheet. Find out their role in maintaining the 'balance' against assets.
- Long-term liabilities are obligations not due within 1 year
- Examples of long-term liabilites include:
--- Long-term debt
--- Deferred tax liabilities
--- Other non-current liabilities (e.g. legal judgements)
Total assets - Total Liabilities = Shareholders' Equity
- Shareholders' Equity is the net worth or 'book value' of the company
- It consists of issued share capital and accumulated earnings
Accumulated Earnings Formula
- Add previous year's Accumulated Earnings
- Add Net Profit
- Subtract Dividends
Long-term, or non-current liabilities, on the Balance Sheet are obligations on the company that do not come due in the next twelve months. The biggest line entry in this part of the Balance Sheet is typically long-term debt. Industries that have a large quantity of fixed assets tend to raise long-term debt to fund the purchases of these assets. However, in the case of MarkerCo, we have no long-term debt. Further solidifying the strength of the business. However, we do have two other entries in non-current liabilities; deferred tax liabilities and other non-current liabilities. Deferred tax liabilities are simply taxes that are owed by the company but not yet paid. Other non-current liabilities are a catch-all that include judgements against the company, unpaid fines, or even financial derivatives. For MarkerCo, long-term liabilities are a small fraction of total assets, which means our shareholders’ equity will be large comparatively. Shareholders' equity is calculated from the equation total assets minus total liabilities is equal to shareholders’ equity. It is essentially the net worth of the company. In the case of MarkerCo, we have two components; issued capital and shared premium and accumulated earnings. Issued capital changes when the company decides to raise money from investors by issuing the investors new shares. Say in 2015 MarkerCo decided to issue new shares worth $2 millon. In the Balance Sheet, the issued capital would rise by $2 million and on the other side of the Balance Sheet the cash amount would rise by $2 million also. Thereby keeping the Balance Sheet balanced. The opposite of issuing new capital is called a stock buyback. In this scenario, the company may want to purchase shares from existing investors particularly if the company thinks the shares are undervalued. Let's say, in a new example, MarkerCo buys back $2.5 million of stock from existing shareholders. The cash balance reduces by $2.5 million and the shareholders' equity reduces by the same amount, ensuring the Balance Sheet stays balanced. During stock buybacks, there may be an additional line item under shareholders' equity called treasury stock, which is where the stock that's been bought back is held. Let's now move on to accumulated earnings. At the end of an accounting period, we take the net profit from the income statement subtract any dividends that are paid to shareholders and add the remaining figure to accumulated earnings. I'm going to include net profit now on our screen. Because MarkerCo doesn't pay out a dividend, our accumulated earnings should increase by the net profit each year. At the end of 2014, we had accumulated earnings of 35.4.
During 2015, we created a net profit of 10.8.
So I add 35.4 and 10.8 to get 46.2, which is my accumulated earnings at the end of 2015. As the net profit of a company increases, so too does the shareholders' equity. As you can imagine, a Common Size Balance Sheet will be able to tell us a lot more about the performance of the company over the past five years. In the next lesson, I'll show you how to build one.