A liability is any financial obligation: overdraft, other debts, money owed to suppliers (“trade payables”), the requirement to meet lease repayments, the gap between the assets and liabilities in a company’s pension plan.
Assets and liabilities are normally divided on the balance sheet between “current” and “non-current”. The former represent things that tend to fluctuate daily: stock in the warehouse, cash in the bank. The latter tend not to change in value except to the extent that assets often depreciate slowly: think of the factory itself or the machinery in it.
The gap between the value of a company’s assets and liabilities is its net value, also called book value, equity or shareholders’ funds. You may have noticed that two figures on the balance sheet are always identical: the assets on the one hand and “liabilities plus equity” on the other. This follows inevitably from the definition of equity.
Sometimes, although not always, a company will report not just the current net value of its assets but the origins of that value. Those origins are the money that shareholders put into the business at the outset (and perhaps in subsequent share sales), the money that the company has retained from its profits (as opposed to handing to shareholders as dividends) and any appreciation in the value of assets.
The money that came directly from investors when they bought their shares is described as share capital but there is a complication. Shares, for no good reason that this column can establish, have a “nominal” value. You will often see that nominal (or “par”) value quoted; for example, shares in Nichols, one of the stocks we covered yesterday, are officially described as “ordinary 10p”. That 10p is not the share price of course and neither is it what investors paid for the shares in the initial flotation. There are also no circumstances in which, say, the company is obliged to give you 10p in exchange for your shares. But that 10p is used as the basis for calculating “share capital”, while the money that represents the difference between that figure and the sum actually raised from the sale of shares to investors is described as the “share premium”.
Gearing is a term used to measure the firm’s dependence on borrowed money. It is the net debt divided by the equity, as we defined it above, and is expressed as a percentage.
You may also see the balance sheet (and the income statement) mention “minority interests”. This refers to the fact that some parts of the business (“joint ventures”) may be partly owned by another party, although the majority is owned by the company you are studying. The liability represents the cost you might bear if you wanted to take full ownership.
Our illustrative stock this week is, as before, Games Workshop.