Defined in a way that everyone understands, a company's equity represents the amount of money owed to shareholders, if all assets are valued and all debts of the company are paid. In specialized language, equity is also called net assets. Depending on the values ​​of assets and debts, equity can be positive (total assets greater than debts) or negative (if debts are greater than the sum of assets).

 

Why does equity level matter?

 

Equity is the main indicator of a company's financial health. When the cumulative value of assets is lower than that of liabilities, it means that the company is facing financial difficulties that, if no action is taken, will worsen in the near future.

A low level of net assets indicates that the entity does not have the financial strength to develop with its own resources, has a high degree of indebtedness and is in a situation where it cannot pay its creditors, suppliers, taxes or employees from its own sources. Thus, the continuity of the company's economic activity is called into question.

Also, companies with positive equity are "bankable", in the sense that banks are attracted to such potential clients, having great reluctance to provide financing to over-indebted companies. Access to financing from European funds can only be achieved if the applicant company is profitable and has positive equity.

A very important aspect that must be emphasized is that companies with positive equity are those that can benefit from tax incentives according to O.U.G. 153/2020.

 

How do I find out what equity my company has?

 

The equity position is presented in the company's annual financial statements, more specifically in the balance sheet. Here are listed the elements that make up a company's equity: share capital, capital premiums, revaluation reserves, legal reserves, retained earnings and financial result for the year. Line 46 of the balance sheet represents the total of all these elements. If the amount presented on this line is positive, it means that the value of the company's assets is greater than the accumulated liabilities, so the equity is positive. If the situation is the opposite, the liabilities are greater, then the company's equity is negative.

 

How can the equity situation be improved?

 

There are several possibilities for this:

 

  a) reducing the amount of dividends distributed to shareholders. Thus, a large part of the profit carried forward from previous financial years remains at the disposal of the company. It is a short-term solution, but it is not a viable option in the medium and long term, due to the fact that the purpose for which the shareholders invested in the company is precisely to obtain dividends;

  b) increasing the share capital, which can be done in cash or in kind. This operation involves new capital contributions from shareholders or the co-optation of other people into the company, an operation not always within everyone's reach;

  c) the establishment of reserves, in periods when the company records profit, but this implies limiting the granting of dividends to shareholders;

  d) revaluation of assets for inclusion in the financial statements, if the current fair value of the assets will increase following the revaluation, resulting in the establishment of revaluation reserves - a component part of equity.

 

In conclusion, it should be emphasized that a poorly capitalized company has insufficient own resources to ensure the continuity of economic activity. In addition, it has a very limited capability to attract financing from outside the company. Asset revaluation could be an effective method to improve the equity situation.

With over 17 years of experience in the field of valuations, FairValue has a strong team of experts in accounting, finance, fixed assets and intellectual property. The over 60 appraisers from across the country, who make up the #fairvalueteam, are ready to promptly respond to any valuation request in the field of financial reporting, regardless of its complexity and the location of the assets on Romanian territory.