Column U – Net Equity

Cameron : Alright. So, column U is net equity. This is straight up financial data you can get from Stock Doctor. Explain to us newbies what net equity means, Tony?

Tony : Equity is simply the assets (what it owns) minus the liabilities (what it owes). So, for a company to have equity, to have positive equity, it means it’s got to have more assets than it does liabilities. Assets are things like plant and equipment that it owns, or property that it owns, that it can be some intangibles that we’ve talked about before like Goodwill. So, if it’s bought companies Goodwill is the difference between the equity that it’s buying and the price it’s paid. And so that can go into the balance sheet too. And there’s also at other times there’s an intangible. So, things like the value of a brand, if it’s a very strong brand. 

There can be reasons why there’s intangibles, but basically, we’re looking at the total assets and we’re taking away the total liabilities. Liabilities, in the main, is  going to be debt, but they’re also short-term things like suppliers I have to pay, but haven’t paid yet, are also counted as a liability.

Cameron : And we’re going to be using this to determine the value of the assets that we’re buying for every dollar spent. So, in my mind, if I think about the coffee shop analogy, if the business costs us $100,000 to buy the whole thing and the net assets of the business are worth $110,000, it’s a low-risk investment, because I could sell the business for parts tomorrow. I could split it up and sell it for parts, like Gordon Gekko in the film Wall Street. And I’d make a profit. But if the net assets are only $20,000 and I have to pay a hundred thousand dollars for it, it’s a higher risk investment.

Tony : That’s right. You’re relying more on the earnings to repay you, rather than the assets.

That’s a good example. So, if the coffee shop rented its space, it’s going to have a lot less assets than the coffee shop which owns its space, because they own the building that they operate from and that might actually have an effect on the valuation that we pay for the company.