Credit: Source: Halliburton Company Annual Report. (Note: In millions of dollars),There's an old saying that it takes money to make money. Some might suggest otherwise; but if we look at a company's balance sheet, we find that, more often than not, this statement is true.
That's because companies often have to issue stock in order to start, fund, or grow a business. It's something that's known as paid-in capital, which is the amount of money that investors have directly invested in the company through either the purchase of common or preferred stock.
Paid-in capital formula
It's pretty easy to calculate the paid-in capital from a company's balance sheet. The formula is:
In order to find the right numbers to plug in, an investor simply needs to head over to the equity section of a company's balance sheet and find those three numbers. Using a real-world example, here's a snapshot of the shareholder's equity section of Halliburton's balance sheet:
Source: Halliburton Company Annual Report. (Note: In millions of dollars),
To calculate Halliburton's paid-in capital, take its stockholder equity ($16,267) minus its retained earnings ($21,809), which is then added to the amount of treasury stock ($8,131). One thing that's worth noting about the treasury stock is that, while it's a negative on the balance sheet because it reduces shareholder equity, it's a positive value in our formula because it represents the amount of stock a company has repurchased with retained earnings.
Here's the outcome from that formula:
In other words, Halliburton investors have plowed nearly $2.6 billion into the company in order to fund its ability to make money on their behalf.
Paid-in capital equation
In addition to that formula, there's one other way to calculate the paid-in capital. There's a two-step equation where we first subtract retained earnings from total stockholders' equity, and then add treasury stock to that result to calculate total paid-in capital. Here's that equation using our real-world Halliburton example:
We get the same result, with just a slightly different method.
The $15,978 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how you can take advantage of these strategies.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in the Foolsaurus . Pop on over there to learn more about our Wiki and how you can be involved in helping the world invest, better! If you see any issues with this page, please email us at knowledgecenter@fool.com . Thanks -- and Fool on!
The article How to Calculate a Paid-In-Capital Balance-Sheet Formula or Equation originally appeared on Fool.com.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Halliburton. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
Copyright © 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
