Finance Formulas / July 18, 2018 / Rory Wise
Stockholders' equity is often referred to as the book value of the company, and it comes from two main sources. The first source is the money originally and subsequently invested in the company. The second source consists of the retained earnings the company accumulates over time through its operations. In most cases, especially when dealing with companies that have been in business for many years, retained earnings is the largest component.
Consider the following example to illustrate the concept. Assume hypothetical company BigBox has operating income or earnings before interest and taxes (EBIT) of $100 million in Year 1, with interest expense of $10 million, and has 100 million shares outstanding. (For the sake of clarity, let’s ignore the effect of taxes for the moment.)
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