Statement of Owner’s Equity: Definition, Examples, and Interpretation

Statement of Owner’s Equity: Definition, Examples, and Interpretation

Statement of Owner’s Equity Definition: In accounting, the statement of owner’s equity shows all components of a company’s funding outside its liabilities and how they change over a specific period; it may include only common shareholders or both common and preferred shareholders.

Here’s a summary from Bank of America’s quarterly report (10-Q) and a more detailed version that shows the changes in each line item:

As some background, a company’s Balance Sheet has three main sections: Assets, Liabilities, and Equity. Assets must always equal Liabilities + Equity.

• Assets: These items can be sold for cash or will contribute to the company’s future growth and operations, such as inventory or plants, property & equipment. They give the company a future benefit.
• Liabilities: These are the company’s short-term and long-term funding sources needed to acquire its assets, and they represent future obligations or cash outflows (e.g., if a company has Debt, it will have to repay that Debt in the future).
• Equity: These are additional funding sources; they are still obligations, but unlike Liabilities, they do not necessarily represent direct cash outflows. Also, these sources may relate to external parties (shareholders) or may be internally generated (Retained Earnings).

The Statement of Owner’s Equity, also known as the Statement of Shareholder’s Equity, details this Equity section of the Balance Sheet.

It may seem significant, but it is less important than the three main financial statements: The Income Statement, Balance Sheet, and Cash Flow Statement.

That’s because most valuation and financial modeling are based on cash flows, not the Balance Sheet, and you can estimate a company’s cash flows solely from its Income Statement and Cash Flow Statement.

The Statement of Owner’s Equity provides additional useful information in certain contexts, but it’s unimportant for ~90% of companies in real-life analyses.

We almost always consolidate this entire section of the financial statements into a single line item in financial models:

The most important point is that specific items always flow into the Equity section: Net Income (addition), Dividends (subtraction), Stock Issuances (addition), and Stock Repurchases (subtraction) are the main ones.

Unrealized Gains and Losses, pension adjustments, and foreign currency translations may also affect one component of this section (Accumulated Other Comprehensive Income, abbreviated to AOCI).

Statement of Owner’s Equity: Key Components

The most important components are as follows:

• Common Stock: This represents the “par value” of each share (often $1.00 or $0.01) times all the common shares the company has issued cumulatively. It does not change even if the company repurchases some of these shares. It increases only if the company issues additional shares in the future.
• Additional Paid-In Capital (APIC): This represents each share’s Market Value minus Par Value, times the total shares issued over time. It does not change when the share price or share count changes but reflects only the prices and quantities at the initial issuance.
• Retained Earnings: These are the company’s saved-up, after-tax earnings. Net Income to Common Shareholders increases this item, and Dividends reduce it because they represent distributions to the shareholders.
• Accumulated Other Comprehensive Income (AOCI): This account records miscellaneous income sources and other items, such as Unrealized Gains and Losses, adjustments for pensions, currency hedging/translation, and so on.
• Treasury Stock: This line is almost always negative and records the company’s stock repurchases over time. If a company repurchases $100 million worth of stock, this line becomes $100 million more negative. It does not change if the share price changes in the future.

These five components comprise “Common Shareholders’ Equity” on the Balance Sheet.

The next two components are part of Equity but are outside of Common Shareholders’ Equity because they relate to other investor groups:

• Preferred Stock: This item is more of a Debt-like liability and represents investors with a higher claim on the company’s Assets than common shareholders (but lower than all forms of Debt).

Preferred Stock typically issues fixed Dividends, and it’s significantly more expensive than Debt because the coupon rates are higher and Preferred Dividends are not tax-deductible.

• Noncontrolling Interests: If the company owns more than 50% but less than 100% of another company, this line represents the percentage they do not own (such as 25% if the parent company owns 75% of another company).

It’s worth forecasting these last two items separately if the company has them.

For more, see our tutorial on Noncontrolling Interests and consolidation accounting.

Statement of Owner’s Equity vs. Cash Flow Statement

At first glance, the Statement of Owner’s Equity might seem like the Income Statement or Cash Flow Statement, as they all track changes over a specific period.

The key difference is that the Statement of Owner’s Equity does not track the company’s Cash balance or even let you estimate this Cash balance.

Certain items here, such as Net Income and Dividends, do affect the Cash balance, but many other Cash-affecting items are absent:

• The Change in Working Capital – It only appears on the Cash Flow Statement.
• Capital Expenditures – It only appears on the Cash Flow Statement.
• Debt Issuances and Repayments – The same (CFS only).

The list goes on; the main point is that the Cash Flow Statement lets you see how a company’s Cash position changes over time, which is critical in financial modeling and valuation.

By contrast, the Statement of Owner’s Equity shows you how a specific section of the Balance Sheet changes over time.

Simple Statement of Owner’s Equity Calculations

Let’s say a company’s Equity account looks like this:

• Common Stock: $10 million
• APIC: $90 million
• Retained Earnings: $500 million
• AOCI: $50 million
• Treasury Stock: ($10 million)

The Total Equity is $10 + $90 + $500 + $50 – $10 = $640 million.

Over one year, the company earns $50 million in Net Income, issues $20 million worth of Stock (with a par value of $2 million), and issues $15 million in Dividends.

Each line item would change as follows:

• Common Stock: $10 million + $2 million = $12 million
• APIC: $90 million + ($20 million – $2 million) = $108 million
• Retained Earnings: $500 million + $50 million – $15 million = $535 million
• AOCI: $50 million (no changes)
• Treasury Stock: ($10 million) (no changes)

The Total Equity is now $695 million after these changes.

Why the Statement of Owner’s Equity is Often an Afterthought

The main issue is that you do not use Equity, Common Shareholders’ Equity, or other Balance Sheet metrics in most models or valuations.

Valuation via comparable company analysis is based on Income Statement metrics such as Revenue, EBIT, EBITDA, or Net Income, and the Discounted Cash Flow Analysis is based on Unlevered Free Cash Flow, linked to the Income Statement and Cash Flow Statement.

Even if you consider merger models, LBO models, or debt vs. equity models, the Statement of Owner’s Equity does not play a direct role.

Analysis of Equity is most useful in the financial institutions sector because Equity directly contributes to “regulatory capital” for banks and insurance firms.

Regulatory capital determines the Dividends they can issue and how much they can grow their assets over time.

It’s also useful to see how much items such as Unrealized Gains/Losses affect a bank’s Equity:

The Statement of Owner’s Equity might also be useful in a sector such as power & utilities because of the “Rate Base” concept, where utility companies can earn only a certain percentage of their Common Equity each year.

Companies “back into” the rates they can charge customers for electricity based on the Net Income they are allowed to earn.

Since Equity is a key driver, analyzing the individual components and how they change over time is useful there.