Paid In Capital Vs Earned Capital

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Owners’ equity is the amount of capital that is invested into a company. The mathematical equation to determine owners’ equity is total assets minus total liabilities (Averkamp, 2015). The stockholders’ equity is classified by three different accounts such as capital stock, paid-in capital and retained earnings (Weygandt, Keiso, & Warfield, 2013). Additionally, these different types of capital are all reported separately. From an investor’s point of view, some of these capitals are more important than each other. An investor should also pay close attention to how the earnings per share of stock are reported as basic or diluted. Knowing the difference can make a big difference in their investments.
Separation of Paid in Capital from Earned
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If most of the company’s capital is from paid-in capital, is the company profitable? This is why earned capital is much more important to investors. Paid-in capital is very important to a company when first starting out. The company will use that capital to eventually produce more earned capital. Earned capital is the actual profit the company is making from their operations. A company that makes high-earned capital is more likely to pay out dividends. For an investor dividends are very important because this is how investors make profits. To an investor, paid-in capital will turn to earned capital, which then should result in dividends and higher stock …show more content…
The basic earnings of a stock is determined by the net income minus preferred dividends divided by the weighted average number of common stock shares outstanding during a reporting period (Weygandt et al., 2013). Some companies that have a more complex capital structure dilute the earnings per share. Shares such as stock options, warrants, convertible preferred stock, and secondary equity offerings can dilute the EPS (Investopedia, 2015). These factors increase the number of outstanding shares, therefore diluting the overall EPS. For an investor, it is more important to focus on the diluted earnings per share as that will give the investor a more accurate picture as to what the share of stock is actually

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