What Is Equity Share Capital & How To Calculate It?

I. Introduction

Equity capital share is an important component of investment and finance. If you are curious about investment concepts of financial matters, you must make some time to learn about equity share capital. Today, we will explore the basic concept of share capital including what it is, how to calculate it, the risks and advantages, and more.

A. A brief overview of Equity Share Capital

Equity share capital is commonly known as risk capital. Investors looking forward to expanding their portfolio often take the help of share capital to identify potentially profitable investment options. It is the money the company raises by selling equity shares.

B. Importance of understanding Equity Share Capital in finance

Equity share capital plays a vital role in finance. It has an important role in the company’s financial structure. It helps the company raise essential funds to support its day-to-day operations, growth prospects, expansion projects, and more. Also, it is an equally important factor for investors that helps them find profitable investment options.

II. What is equity share capital?

If you want to know about equity share capital calculation or its pros and cons, you must learn about what it is first. Therefore, we will begin from the basics and learn about equity share or risk capital first.

A. Definition and basic concept

By definition, equity share capital is a fundamental component in the financial/capital structure of a company or business. ESC is the capital companies generate through issuing equity shares. So, in simple words, equity or risk capital is the money businesses raise by selling shares to the public investment market.

B. Role of equity share capital in a company’s capital structure

Equity share capital plays a vital role in a company’s structure. It is the business capital companies raise by selling equity shares. The equity capital becomes a long-term source fund for the company’s various financial needs, including debt repayment, research and development, business expansion, day-to-day operations, and more.

III. Types of equity share capital

There are various types of equity share capital such as Authorized Share Capital, Issued Share Capital, Subscribed Equity Share Capital, Paid-Up Equity Share Capital, Rights Shares, Bonus Shares, Sweat Equity Shares, Preference Shares, and more. However, the primary equity share division includes common shares and preferred shares.

Read More: What are Equity Shares? Capital, Market & More

A. Common shares vs preferred shares

All equity shares can be divided into two groups: common or ordinary equity shares and preferred shares. Both types of equity shares have high-risk high-return approaches but differ from each other in terms of dividend payout priority, voting rights, and other aspects.

B. Voting rights and dividend preferences

The equity shareholders get unique benefits in the form of voting rights and dividend preferences. The common equity shareholders have voting rights which helps them participate in internal board meetings and decision-making processes while their dividends get issued at the last. On the other hand, preferred equity shareholders do not have a voting right in the company’s internal matters, but they always get priority over common shareholders when it comes to issuing dividends.

IV. How to calculate equity share capital

There are several ways you can calculate the equity share capital of a company or business. Depending on your understanding, needs, and preferences you can select any method to calculate equity share capital of a company. One can derive the accurate figure of equity share capital by either subtracting the total liability from the total assets of the company or multiplying the total number of equity shares with the price per share. Both ways, you can get an accurate figure of the company’s ESC. 

A. Basic formula

There are two important and widely used formulas available for calculating equity share capital. We discuss them below.

Formula 1:

Equity share capital = Total Asset – Total Liability.

Formula 2:

Equity share capital = Total Number of Equity Shares × Price Per Equity Share.

Both formulas mentioned above can accurately calculate the exact figure of the ESC of a company. And investors can use any formula depending on their needs and preferences.

B. Practical examples for better comprehension

If you are new to the concept of equity share capital, it can be a bit challenging to understand the calculation process and how it works. With practical examples, you will be able to understand better. For example, if Company X issues 100,000 equity shares with a share per value of Rs 10, then the ESC of Company X will be:

100,000 (total number of equity shares) x Rs 10 (price per share) = Rs 1,000,000 (ESC).

V. Significance of equity share capital

The equity share capital has a strong significance in a company’s capital structure. It also plays a crucial role in finance. Let’s learn about them in detail.

A. Impact on ownership and control

Equity share capital plays a vital role in a company’s ownership and control aspect. Equity shares offer a percentage of ownership in the company to the investors. So, the total amount of ESC of a company offers insights into how much ownership and control the investors have in the company.

B. Relationship with company performance

On the other hand, equity share capital also influences a company’s growth and performance. Equity shares offer companies the ability to accumulate capital for various financial needs. As a result, it offers the essential financial fuel required for business expansion, new ventures, and day-to-day operations.

VI. Factors influencing equity share capital

Several factors can influence equity share capital. Whether you are an investor or a business professional, you must learn about the factors that can influence equity share capital. Here are some essential factors that significantly influence ESC.

A. Market conditions

Market condition is one of the major factors that greatly influences the equity share capital of a company. Market conditions directly impact a company’s share buying and selling activity. As a result, they can impact the price of the equity shares resulting in a change in equity share capital.

B. Company’s financial health

Another essential factor that significantly influences equity share capital is a company’s financial health. The equity share capital helps companies collect essential funds that they can use for company expansion projects and daily operations without any financial debt. 

Read More: What are financial statements, and why are they important?

VII. Real-world applications

Real-world applications help to illustrate the efficiency and effectiveness of equity share capital. Real-world examples are also beneficial in understanding how to implement equity share capital calculation and why you should consider it before investment

A. Case studies illustrating the role of equity share capital

As a part of the 2023 annual report, Apple has reported its shareholders equity of $73.812 billion. This value was made up of additional paid-in capital and common stocks. Among the 50.4 million shares authorized, Apple has only 15.5 million shares. Apple had an accumulated deficit of $214 million and, as of 30 September 2023.

So, as a part of the 2023 annual report, Apple listed $62.146 billion of shareholder equity, which is more than the previous year’s equity share ( $50.672 billion).

B. Success stories and potential challenges

Equity share capital offers various benefits or advantages for both businesses as well as investors. ESC helps in business growth, increased business performance, higher dividends, ownership and control, reduced debt, and so on as it is an essential component of a company’s financial structure.

However, equity shares can also bring several challenges for both businesses and investors. For example, businesses can struggle for ownership and control while investors have higher volatility investments that can cause significant losses.

VIII. Common misconceptions

Several myths and misconceptions have surrounded equity share capital that have created unwanted confusion among investors.

A.    Addressing myths and misunderstandings about Equity Share Capital

There are several myths and misconceptions associated with equity share capital including:

• Low NAV schemes generate higher returns: NAV is just a reflection of a scheme’s price. Returns depend on performance, not the NAV value itself.
• Higher risk guarantees higher returns: High risk can lead to bigger losses too. Returns depend on market conditions, not just risk level.
• Only the rich can invest in equities: Anyone can invest in shares, starting with small amounts through mutual funds, direct stocks, or penny stocks. Wealth isn’t a barrier.

IX. Conclusion

Equity share capital is an important component of the company’s financial structure. It is the amount of capital companies raise by issuing equity shares to the public.

A. Recap of key points

Equity share capital is the money companies generate through issuing equity shares that give off a certain percentage of ownership of the company. There are various types of risk capital and most investors calculate it for finding the profitable investment option. However, ESC has its own pros and cons like any other financial metric.

B. Encouragement for readers to delve into equity investments wisely

Equity share capital is an essential component of a company’s capital structure. Therefore, whether you are an investor or professional running a business, you must learn about ESC along with how it works, how to calculate it, and its pros and cons. It will help you invest in a company equity share wisely.

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