Today, many SMEs with sales of less than 50 million do not have enough equity capital. However, equity is a guarantee of confidence for banks, a reserve for financing your projects and security in the event of a financial crisis. Equity is one of the criteria used to analyse whether your company is solvent, in particular by calculating the level of equity in relation to financial debts.
In this article, you will find the definition of equity capital for a company, as well as its importance and how to obtain and analyse it.
Your equity (also known as “shareholders’ equity”) is capital incorporated directly into your company’s liabilities. It represents all your resources and is an indicator of the financial value of your company. Equity capital is transferred by your shareholders or is also generated by your company’s profits. So each year, when your company draws up its profit balance sheet, it gives part of it to the shareholders and the other part is kept to strengthen your equity capital, in particular to be able to invest in the future.
Equity capital is calculated as follows:
Your equity is shown on the liabilities side of your balance sheet. It is made up as follows: firstly, shareholders’ equity (capital, reserves, retained earnings, etc.) and secondly, other equity, which does not apply to all companies (share issues, conditional advances from the government, etc.).
This could enable you to finance the growth of your business in the future. If bank loans and grants are not possible because you are going through a development phase involving a change of business model or expansion into new markets, you can consider increasing your equity by raising funds. This will enable you to raise debt from banks or specialist debt funds at the same time. This leverage will ensure that you have the funds you need for your development plan.
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By analysing your equity, you can determine whether it is positive or negative.
Negative equity is equity that is less than half your share capital. This means that your company is in financial difficulty. This is not very reassuring for creditors. A general meeting must therefore be called to reconstitute the equity.
If your equity is above half your share capital, it is positive. It is an indication of your financial strength, even if it is not an absolute guarantee of it.
In conclusion, equity is a partial reflection of a company’s financial health. So it’s vital to consolidate your equity properly and make the right decisions about it. If you would like an expert opinion on your equity capital, we would be delighted to help you.