Shareholders' equity 'is a better measure'

Office workers crossing a road in Robinson Road.
Office workers crossing a road in Robinson Road.PHOTO: AFP

Shareholders' equity should replace paid-up capital as a measure of the size and complexity of companies, said the panel reviewing the elected presidency.

Unlike paid-up capital, share- holders' equity reflects more clearly a company's current value, the report added.

Shareholders' equity refers to a company's total assets minus its total liabilities, while paid-up capital is the amount of money a company has received from investors buying its shares.

There are several advantages in using paid-up capital as a criterion, the report said.

First, it is a convenient measure because the paid-up capital of all Singapore companies, including private firms, is known.

Second, paid-up capital is more stable than other measures, such as net assets or net revenue, which tend to fluctuate.

But it may not give an accurate measure of a company's current size, or the value and complexity of its operations, because paid-up capital is a historical measure that may not reflect the growth or decline of a company's assets over time, the report said.

 

For instance, a company with significant paid-up capital at its inception may see its reserves deplete over time if growth stagnates and debts build up.

On the flip side, a company with modest beginnings can grow over time by investing in its assets or accumulating funds. It may not necessarily raise money by issuing shares.

In both cases, paid-up capital would not reflect accurately the company's size.

Shareholders' equity would be a better measure, the report said.

Other possible indicators, such as a company's net tangible assets and its market capitalisation, were considered by the commission.

Net tangible assets, however, are not as comprehensive a measure as shareholders' equity, which takes into account both tangible and intangible assets.

Market capitalisation applies only to public-listed companies and is subject to significant volatility generated by the trading of their shares in the stock market.

Chia Yan Min

A version of this article appeared in the print edition of The Straits Times on September 08, 2016, with the headline 'Shareholders' equity 'is a better measure''. Print Edition | Subscribe