Equity Components: What do they Reveal?

We have looked at a company's balance sheet in several previous tutorials such as here, but we have largely focused on the assets and liabilities sections within. The third section is equity, which - although doesn't contain as much relevant information - does contain points that are worth understanding. Indeed, trends in several figures are actually quite enlightening about the history of the company and can actually hint at traits of company management, such as their willingness to issue equity. Now we can look at a couple of interesting trends.

Prevailing Trends in the Share Capital and Share Premium

The movements in the year-on-year value of the Share Capital and Share Premium figures can be very useful for a couple of important reasons:

 - They are a proxy measurement for how willing management are to issue equity. Tally this with the prevailing share price movement over the period. If the combined figure increases rapidly with the share price declining over the period, then it represents value destruction for shareholders.
 - The trend can represent the ability of the company to access non-dilutive forms of finance. If the combined figure steadily increases over time with no profits/free cash flows generated, then it could suggest that the company is either unable or unwilling to access debt financing.

An Example: Motive Television (LSE:MTV)

Let's look at an example of where numerous equity raises/placings have been used to fund a company. To look at the amount raised between two period-end dates, we simply have to take the balance sheet figures for the closest point in time to both of those dates, and compare. Below we have the relevant parts of Motive TVs balance sheet for 31st December 2010 and 30th June 2014; that is roughly a 3 and a half year period.

31st December 2010: Combined Figure = £5.82m

30th June 2014: Combined Figure = £16.21m
The immediate figure we can draw from this is that Motive TV raised ~£10.4m over the 3 and a half year period. In isolation this does not mean a lot, so you have to look at the share price chart to deduce the progress of the company. The chart for the same period is below.


It paints a bleak picture of Motive TVs progress and suggests that the equity raises have simply been a method of providing working capital whilst shareholder value has drained away. That is epitomised by the market cap of £1.56m being a fraction of the total equity injected over the period. It also suggests that management have either been willing to severely dilute their shareholders, have been unable to access debt, or both.

The Level of Retained Earnings/Losses

The immediate point to recognise about this figure is that it will be downward skewed is the company has paid out dividends. Importantly though, the real intuition is with loss-making companies to examine how much cash they have burnt over time, so the dividend factor is not really an issue. A high retained losses figure could suggest that the company has been a poor performer historically, and has struggled to generate profits.

An Example: Phorm Corporation (LSE:PHRM)

Let's look at Phorm's retained losses (a.k.a accumulated deficit) between 31st December 2007 and 30th June 2014. In advance, I'll mention that Phorm has been a well-known serial loss making IT company.

31st December 2007: Accumulated Deficit = $38.8m
30th June 2014: Accumulated Deficit = $277.0m
Describing Phorm's losses as having ballooned would not be an understatement, and the share capital figures also show a huge increase of almost $250m over the same period.

This mixture of deepening losses and extensive share placings unsurprisingly also means that Phorm has a very unattractive chart showing massive shareholder value destruction over the period. It has fallen from the heights of 2000p to less than 10p over that period.