Equity and debt. What are? What are the differences?

A company’s equity represents the financial resources invested by the owners or shareholders. Shareholders are the company’s source of permanent financing and comprise share capital, reserves, accumulated profits, supplementary and ancillary payments. Capital reflects the part of the company that belongs to the owners, influencing its financial health and its ability to attract investors. Furthermore, they are used to calculate financial indicators and evaluate the company’s performance and profitability.

A company’s debt is the amount it owes to credit institutions, resulting from loans, financing or debt securities. It can be short-term (up to one year) or long-term (more than one year). Companies use debt as a way to obtain additional capital to finance their operations and investments, without having to give up the inherent upside of the profits generated by the operation (in the form of dividends or capital appreciation). However, it is necessary to comply with credit responsibilities, such as interest and capital payments and, within the established deadlines, complying with the imposed debt covenants.

Equity and debt are two distinct forms of financing used by a company. These are some differences between them:

Own capitals:

– Equity represents the financial resources invested by the company’s owners or shareholders.

– They are the company’s source of permanent financing and do not have a specific maturity date (except for specific instruments).

– They are made up of share capital, reserves, accumulated profits, supplementary and ancillary payments.

– They belong to the owners or shareholders of the company and represent their participation in the company.

– They do not require the payment of interest, but are subject to the risk of loss if the company makes losses.

– They influence the company’s strategic decision-making, as shareholders have the right to vote and share in profits.

Debt:

– Financial debt refers to the amount of capital that the company owes to banks and other financial institutions.

– It is a temporary source of financing, with a defined payment period, which can be short term (up to one year) or long term (more than one year).

– It involves the issuance of debt securities, loans or other forms of raising funds from external financial creditors.

– It implies the payment of interest to creditors within the established deadlines.

– Debt increases the company’s financial risk, as it is necessary to generate sufficient cash flow to meet payment obligations.

– Creditors do not have the right to vote or share in the company’s profits, only to receive the payments due.

ValuingTools evaluates the equity of companies operating in different industries, allowing shareholders to make informed decisions about whether to raise capital in the form of equity or debt.

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