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Assignment (4)

Water Resources Group

Shareholder’s equity is a defined as the residual claim on a company’s assets controlled by investors once all liabilities have been met. Shareholder’s equity is reported as part of a company’s balance sheet subsequent to the liabilities section and is reported as of the closing date of the financial statements. Shareholder’s equity is calculated as assets minus liabilities; however, in the case of liabilities exceeding assets, equity will appear as a negative amount on the balance sheet.

There are several main accounts within stockholder’s equity which are reported by majority of companies including retained earnings or accumulated losses, contributed equity and various reserve accounts. Retained earnings or accumulated losses represent the net income or losses which have not been distributed to owners through dividends, but have instead been retained by the company. This account is important as it provides the link between the income statement and balance sheet of a company as net income or losses reported on the income statement are transferred to the retained earnings or accumulated losses account on the balance sheet at the close of the reporting period. Contributed equity is the monetary value of total stock that shareholders have directly purchased from the company. It should be noted that shares bought on the secondary markets do not contribute to the contributed equity amount as the involved parties are external to the company. Thirdly, the reserve accounts reported in stockholder’s equity are any cash reserves held by the company which have been deemed to be necessary and usually represent only a small portion of stockholder’s equity.

Shareholder’s equity is a significant aspect of a company’s balance sheet as it contains information related to a company’s past earnings as well as the ownership value of shareholders. Having access to this data allows insightful analysis into the financial performance of a company during the reporting period. There are many measure of financial performance which involves the use of figure found in shareholder’s equity including shareholder equity ratio, debt to equity ratio, times interest earned and earnings per share. These figures provide an understanding of a company’s profitability and long term sustainability as they are mainly derived from earnings figures. Many shareholders also prefer the use of these ratios to determine the attractiveness of a company as an investment due to their use of contributed equity figures which are directly related to returns gained from shareholder contribution.

Water Resources Group (WRG) is a utilities corporation listed on the Australian Stock exchange which supplies and treats water on an industrial scale and aims to deliver low cost potable water to consumers. Analysing WRG’s stockholder equity portion of the balance sheet shows that the company is operating with negative equity of $2.1m as a result of WRG’s liabilities exceeding the assets held by the company. This is generally an indication that the company is performing poorly as the amount WSR owes to external parties exceeds the assets current held on the balance sheet. This also feeds into the accumulated losses of $70m which reflects the losses sustained by WRG over the company’s lifetime. Much of this loss is sustained by shareholders as the balance of contributed equity as of 31st of December 2012 was $65.8m. Although many companies go through a period of net loss, sustained and successive periods of net loss reflect poorly on the company’s management and operational efficiency and reflect an unsustainable business plan. The negative characteristics of WSR’s stockholder’s equity section of the balance sheet can be further explored when compared to healthy balance sheet. One such example is AGL, one of the top 50 companies listed on the Australian Stock Exchange which similarly operates in the utilities sector. As AGL is a much larger and more established organisation, the balance sheet, in particular, the stockholder’s equity section of their balance sheet is much stronger when compared to WRG. AGL operates with an equity balance of $7.1b with a healthy level of retained earnings balance of $1.8b. These two figures show that AGL’s asset value exceeds their liabilities to external parties which are important for financial stability and sustainability. The retained earnings balance also reflects the sustained profitability of AGL over a period of time and provides the company with a significant buffer against unforseen future losses. When comparing these two companies, it is apparent the great disparity between the stockholder’s equity portion of their balance sheets, where WRG provides an example of a company with accumulated losses compared to AGL which has a significant level of retained earnings.

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Assignment (4)
Last updated: Feb 2024

Page 1

WRG’s stockholder equity portion of the balance sheet shows that the company is operating with negative equity of $2.1m as a result of WRG’s liabilities exceeding the assets held by the company. This is generally an indication that the company is performing poorly as the amount WSR owes to external parties exceeds the assets current held on the balance sheet. This also feeds into the accumulated losses of $70m which reflects the losses sustained by WRG over the company’s lifetime. Much of this loss is sustained by shareholders as the balance of contributed equity as of 31st of December 2012 was $65.8m. Although many companies go through a period of net loss, sustained and successive periods of net loss reflect poorly on the company’s management and operational efficiency and reflect an unsustainable business plan. The negative characteristics of WSR’s stockholder’s equity section of the balance sheet can be further explored when compared to healthy balance sheet. One such example is AGL, one of the top 50 companies listed on the Australian Stock Exchange which similarly operates in the utilities sector. As AGL is a much larger and more established organisation, the balance sheet, in particular, the stockholder’s equity section of their balance sheet is much stronger when compared to WRG. AGL operates with an equity balance of $7.1b with a healthy level of retained earnings balance of $1.8b. These two figures show that AGL’s asset value exceeds their liabilities to external parties which are important for financial stability and sustainability. The retained earnings balance also reflects the sustained profitability of AGL over a period of time and provides the company with a significant buffer against unforseen future losses. When comparing these two companies, it is apparent the great disparity between the stockholder’s equity portion of their balance sheets, where WRG provides an example of a company with accumulated losses compared to AGL which has a significant level of retained earnings.

The table below shows the percentage increase between 31st December 2011 to 2012 of both the number of shares and the monetary value of these shares for AGL and WRG. WRG’s total number of shares increased dramatically with a 35.59% increase compared to an 18% increase for AGL. The increase aggregate value of the shares, however, shows a different story, where the value of WRG’s shares only increased by 8% compared to 23% for AGL. These figures suggesting that newly issued shares during the year for WRG where sold at a much lower price compared to previously issued shares, in comparison to AGL, where new shares were issued at a higher price than older shares.

Stockholder Equity – year ended 31st December 2012

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Assignment (4)
Last updated: Feb 2024

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