Investors who analyze companies before buying stock must consider a number of different factors and measurements, many of which appear within a company's financial statements. In particular, the statement of owner's equity, also known as a statement of retained earnings or statement of changes in equity, includes information that, when it changes, can reveal positive information about making an investment.
Investment Value
One key advantage of a change in an owner's equity statement occurs when the statement shows a rise in equity value. Businesses produce owner's equity statements annually, and an increase from year to year shows that the business has more value to its owners. While this doesn't directly impact stock price, it tends to drive market prices higher as more investors become interested in ownership. This means more investment value for current owners and access to the latest information about equity growth for prospective investors.
Likelihood of Dividends
Trends in an owner's equity statement over time can reveal whether a company is likely to issue dividends in the future. Dividends are money that a business earns but pays out to its stockholders in the form of cash rather than keeping as retained earnings. Paying dividends causes the amount listed in an owner's equity statement to fall. However, if a recent owner's equity statement shows a low level of equity, it may mean that the board of directors will vote to cut the dividend as a means of raising owner's equity. For investors who count on dividend payments for income that allows them to keep their shares, upward changes in equity can be a positive sign that dividends are likely to remain.
Growth Potential
An increasing owner's equity statement also indicates that a company has a strong growth potential. Rises in retained earnings, which form owners equity, mean that a company has its liabilities under control and is receiving steady income. All of these things mean that the business can afford to invest in expansion when given the right opportunity. Growth potential drives up stock prices and benefits current owners.
Enhanced Accuracy
Some changes that appear on an owner's equity statement are corrections and adjustments from the accounting process. Every financial statement relies on estimates at some point. As a business continues to operate and collect financial data, its accountants replace estimates with actual data. They also issue adjusted statements, which are more accurate and provide a more clear look at the company's financial status. This benefits anyone who must know how a company is performing, including analysts, prospective investors and leaders within the company.
