Long Term Capitalization

Long Term Capitalization 

Capitalization 

The sources of long term capital for a company are: 

Long Term Liabilities; and Stockholders' Equity. 

These are the sources of the capital for the company. The company raised funds for its operations by selling bonds, preferred stock, and common stock. Thus, this section analyzes the "capitalization" of the company. This is highlighted following:

The company has sold $2,000,000 of long term debt and has stockholders' equity of $8,000,000 for a total capitalization of $10,000,000. 

The items that are included in the capitalization of a company are: 

Long Term Debt Called "funded debt" because it is a source of long term funding for the company. For balance sheet purposes, this is debt that must be repaid in more than one year. ABC has raised $2,000,000 by selling long term bonds. 

Preferred Stock ABC has sold $1,000,000 of $100 par preferred stock. Therefore, 10,000 shares have been issued. Common Stock Consists of common at par; capital in excess of par; and retained earnings. Examining each separately:

Common at Par ABC has placed a par value of $1 per share on its stock (this is an arbitrary value, usually kept very low for state tax purposes). Since $1,000,000 was raised at $1 par, 1,000,000 common shares were issued. 

Capital in Excess of Par If shareholders actually paid more than par for each share, this amount shows as "CEP" - Capital in Excess of Par. $2,000,000 of CEP is recorded, or $2 additional per common share. Therefore, the company received $3 per common share from the sale of its stock. 

Retained Earnings Theoretically, the company should pay out all of its earnings to shareholders as a dividend. However, if the company only pays out part of its earnings as a dividend and retains the rest of the funds for use in the business, it really has taken an "involuntary capital contribution" from the shareholders. These accumulated retained earnings "belong" to the common shareholders. The $4,000,000 retained is counted as part of common stockholder equity. Total common stockholders' equity consists of $1,000,000 common at par + $2,000,000 capital in excess of par + $4,000,000 retained earnings = $7,000,000. 

Debt/Equity Ratio A fundamental analyst will examine the "debt to equity ratio" to evaluate the company's capital structure. For example, if the company is highly leveraged (debt is a large proportion of capitalization), covering interest charges may be difficult if income falls.

$2, 000, 000 / $8, 000, 000 = 25% 

Note that Stockholders' Equity includes both Common Equity ($7,000,000) and preferred stock ($1,000,000). Claim Priority in Liquidation In a corporate liquidation, the priority of claim to assets is: Secured Bondholders; Unsecured Bondholders; Preferred Stockholders; and finally Common Stockholders. A fundamental analyst can get the corporation's financial statements by examining the corporation's filings with the SEC. These documents are made available to the public. The major financial statement filings are the: 10K - Corporate Annual Audited Financial Statements The company's audited year-end financial statements, filed with the SEC. These are filed anywhere from 60–90 days after year end, with larger companies (over $700 million public float) filing within 60 days and smaller companies filing within 90 days.

10Q - Corporate Quarterly Unaudited Financial Statements The company's quarterly unaudited financial statements. These are filed with the SEC either 40 days (larger companies) or 45 days (smaller companies) after quarter-end. 

Footnotes 

Finally, all corporate financial statements are accompanied by an extensive footnotes section. The footnotes section details: 

Significant Accounting Policies;

 Upcoming Scheduled Debt Repayments; 

Open Contractual Commitments, 

including Derivatives;

 Open Unused Credit Lines; 

Future Lease Payment Liabilities; 

Future Pension Liabilities; 

Estimated Legal Liabilities; 

Deferred Tax Liabilities; 

Details of Discontinued Operations Charges.