Yes, this is possible if the stock price has declined so much that the market capitalization, calculated as # of shares x stock price, is lower than the original book value of shareholder’s equity. The book value of shareholder’s equity is recorded at the amount of the initial investment. In oth...

Liabilities are considered debt if they require interest payments. For example, a loan from a bank would be considered debt since you are required to pay interest on it. However, accounts payable would not be considered debt since you do not pay interest on it. It’s a net working capital item beca...

Market capitalization is calculated by the total number of common shares outstanding multiplied by the stock price, It does not account for options. Of the three metrics, it is the easiest to find, calculate, and understand. Fully diluted equity is calculated as fully diluted shares outstanding mult...

Shareholder’s equity represents the portion of the assets that have been funded by equity as opposed to liabilities / debt. It also acts as an “odometer” of all the net income a company has earned / accumulated. Some sources of equity investment include: Original investment by the founder(s) t...

Assets = Liabilities + Shareholder’s Equity Above is the balance sheet equation, which is saying that all assets must be funded by either liabilities (e.g. debt) or shareholder’s equity (e.g. money from private or public investors). If the equation does not balance, that means there is an error ...

There are two ways the cash flow statement can be prepared: the direct method, and the indirect method. The direct method is the easiest to understand, but rarely used in more publicly traded companies. We just record all the cash inflows and outflows as they happen, categorizing them between cash f...

Even if a company is growing and has positive EBITDA margins, it is possible that the expenses beneath EBITDA are large enough to counteract any positive EBITDA, ultimately resulting in a negative net income. Expense items beneath EBITDA include: depreciation and amortization, interest, and tax. The...

Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold (COGS) Purchases do not affect the income statement, since they represent purchases of unsold inventory which have not been delivered to the customer. However, COGS does show up on the income statement, since it represents...

Some businesses will take an initial deposit from the customer and deliver the goods or services at a later date or over a period of time. Instead of having the customer pay on credit, which would go to accounts receivable, you receive the deposit and end up with deferred / unearned revenue since yo...