Common equity is a way of measuring equity that only takes into account the dollar amount that common shareholders have invested in a company, disregarding that invested by preferred shareholders. This includes stock held by common shareholders, as well as a corporation's retained earnings and any contributions that exceed the stock's normal value, which is called additional paid-in capital. Calculating common equity allows financial analysts to go beyond the broad calculation of shareholders’ equity and obtain a more precise view of the financial stability of the corporation.
The formula for arriving at the common equity is relatively simple. First, the total sale of common stock in circulation is determined. This is added to the total of retained earnings. Together, this helps to arrive at the amount of capital surplus generated by the common stock and thus the overall value for the stock during the current period. For a quick calculation, many analysts will simply take the current figure of shareholder’s equity and subtract the amount of preferred equity. When all is in order, this figure should equal or come very close to the figure generated by the more comprehensive process.
Monitoring the current status of common equity is a useful tool in staying in touch with the financial condition of the corporation. A change in the equity can provide insight into the growth pattern or the rate of decline in the overall profitability of the corporation. In some cases, a change can alert directors and key executives to trends before they have the chance to negatively impact the operations and public image of the company among investors.
Typically, companies will calculate the current common equity on at least a quarterly basis. It is not unusual for some companies to make the calculation of common equity part of their regular monthly accounting process. This particularly true with corporations who understand monitoring the current overall equity of the shares issued is a great way to help address and contain stockholder trends before any negative effects can result.
