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Would shareholder’s equity ever be greater than market capitalization?

Yes, this is possible if the stock price has declined so much that the market capitalization, calculated as # of shares x stock price, is lower than the original book value of shareholder’s equity. The book value of shareholder’s equity is recorded at the amount of the initial investment. In oth...
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Which liabilities on the balance sheet are considered debt and which liabilities are considered working capital?

Liabilities are considered debt if they require interest payments. For example, a loan from a bank would be considered debt since you are required to pay interest on it. However, accounts payable would not be considered debt since you do not pay interest on it. It’s a net working capital item beca...
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What is the difference between market capitalization, fully diluted equity value, and shareholder’s equity?

Market capitalization is calculated by the total number of common shares outstanding multiplied by the stock price, It does not account for options. Of the three metrics, it is the easiest to find, calculate, and understand. Fully diluted equity is calculated as fully diluted shares outstanding mult...
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What does shareholder’s equity on the balance sheet represent?

Shareholder’s equity represents the portion of the assets that have been funded by equity as opposed to liabilities / debt. It also acts as an “odometer” of all the net income a company has earned / accumulated. Some sources of equity investment include: Original investment by the founder(s) t...
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If the balance sheet doesn’t balance, what does that mean? How can you fix that?

Assets = Liabilities + Shareholder’s Equity Above is the balance sheet equation, which is saying that all assets must be funded by either liabilities (e.g. debt) or shareholder’s equity (e.g. money from private or public investors). If the equation does not balance, that means there is an error ...
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What are two ways the cash flow statement can be displayed? Which one is better?

There are two ways the cash flow statement can be prepared: the direct method, and the indirect method. The direct method is the easiest to understand, but rarely used in more publicly traded companies. We just record all the cash inflows and outflows as they happen, categorizing them between cash f...
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If a company is growing, has positive EBITDA margins, and growing customer base, how could it post a loss?

Even if a company is growing and has positive EBITDA margins, it is possible that the expenses beneath EBITDA are large enough to counteract any positive EBITDA, ultimately resulting in a negative net income. Expense items beneath EBITDA include: depreciation and amortization, interest, and tax. The...
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Why do changes in inventory affect the income statement?

Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold (COGS) Purchases do not affect the income statement, since they represent purchases of unsold inventory which have not been delivered to the customer. However, COGS does show up on the income statement, since it represents...
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Why can net working capital be negative?

Some businesses will take an initial deposit from the customer and deliver the goods or services at a later date or over a period of time. Instead of having the customer pay on credit, which would go to accounts receivable, you receive the deposit and end up with deferred / unearned revenue since yo...
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If you could only use two financial statements, which would you use to evaluate an investment? Assume you have at least two years of data.

You would use the income statement and balance sheet. The income statement shows the profitability of the company, and can display key metrics like revenue growth, gross margin, and EBITDA margin, which are key to understanding and valuing a business. We should use the balance sheet if we have more ...
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