Hey,
I know that most of you guys are finance gurus. Does anyone know what the term 'equity' means exactly? If I had two identical companies, and one had higher equity. What does this mean in terms of their profitability?
Can equity be a measure of profitability? I've been searching all over the internet, it just confuses me.
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The Market Value of Equity typically refers to the Market Capitalization for a company, or the product of no. shares outstanding and the current price of the company stock.
Equity simply means owning a piece of the company. Say you owned a share of ExxonMobil, holding that share means you are a part owner: you are involved in voting for directors, and are able to receive dividends (though not entitled to, a firm can choose to not issue dividends).
The book value of equity refers to Shareholders' or Owners' Equity on the balance sheet. It is simply the level of funds provided by shareholders plus retained earnings. If you are valuing a firm, you would use the (current) market value and not the (historical) book value.
As for comparing two firms with equity, let's use a real example. Citi (NYSE: C) has a market capitalization of $266.12Bln and Wells Fargo (NYSE:WFC) has $119.41Bln. The metric for profitability in the banking industry is Return on Equity, or the rate of return based on the level of stockholders' equity. You might think scale and scope would make Citi more profitable. Using a Twelve-Months Trailing (TTM) measure, I found this morning Citi:17.61% Wells Fargo:19.75%
So to answer your question, no: a firm with a greater market capitalization doesn't mean its more profitable.
if it was true... i would only invest in the largest companies and ill be rich biatch...
are you assuming this b/c roe measures profitability and equity is in the equation?
ROE= net income/ equity
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