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Financial Statements to Stock Valuation

01. What do you own when you buy a share?

Distinguish ownership, book equity, and market capitalization with Hanbit Tools.

Two independent verification paths recombining inside a valuation range while a failed fragment falls beyond an exit boundary
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Is a share cheap at KRW 10,000? Its price alone cannot tell you what the whole business costs. This series follows Hanbit Tools, a fictional tool distributor, from its first transactions to an equity valuation. All Hanbit figures are educational assumptions. Amounts are in KRW million, except share counts and prices explicitly stated in won.

A share represents ownership

Common stock represents an ownership interest, generally with voting and dividend participation rights. Dividends and recovery of invested capital are not guaranteed; common shareholders rank behind creditors in liquidation.1 Owning 1% does not mean you can withdraw 1% of the company's cash whenever you want.

Hanbit issues 10,000 ordinary shares at KRW 4,000, raising equity of 40. It borrows 60 from a bank before its first operating year begins. Opening cash is therefore 100, debt is 60, and equity is 40. Until a later chapter explicitly introduces a separate scenario, there are no preferred shares, treasury shares, convertible instruments, or changes in the share count.

Buying 100 existing shares gives you 1% ownership. Your payment goes to the selling shareholder. Buying newly issued shares instead brings money into the company. Asking who receives the cash is an effective way to distinguish a secondary market trade from an equity financing.

Market value differs from book equity

Assume a year-end quote of KRW 12,000. Market capitalization is 12,000 × 10,000 shares = 120 million. That differs from both the original contribution and the year-end accounting balance we will calculate next.

MeasureAmountQuestion answered
Initial paid-in equity40What did shareholders contribute?
Year-end book equity68.8What remains after accounting liabilities?
Assumed market capitalization120What does the quoted price imply for all shares?

Book equity is not a promise of liquidation cash. Inventory sale proceeds, customer collections, equipment disposal values, and closure costs could differ from recorded amounts. Financial statements help identify what requires investigation rather than providing a single guaranteed recovery value.2

Connect the business to the shareholders' claim

Two otherwise similar businesses can leave different amounts for shareholders if their debt and surplus cash differ. A valuation of operating cash flows must be bridged to equity by considering nonoperating assets and other claims.3

When someone says a company is worth 150, ask whether that means the operations or the ordinary equity. Real companies may require adjustments for leases, preferred shares, or noncontrolling interests. Our simplified example excludes those complications. Later chapters explicitly separate operating cash from excess cash.

Keep a short record

Write one sentence about how the business earns money, followed by shares outstanding, their measurement date, the quote date, and market capitalization. For Hanbit: it buys tools and resells them to business customers, sometimes on credit. Explain who pays and why before explaining what the stock price did.

Next, we will reconcile the company's first-year profit of 28.8 with its falling cash balance.

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The twelve-chapter reading path

  1. What do you own when you buy a share?
  2. Reading the financial statements together
  3. Why profit can fall while revenue grows
  4. Why a profitable company can run short of cash
  5. Does more debt always mean more danger?
  6. Where did the money the company earned go?
  7. Does high ROE mean a good business?
  8. Is a low P/E stock really cheap?
  9. Why can a stock fall after good earnings?
  10. How dividends, buybacks, and share issues change your stake
  11. What to look for in the financial statement notes
  12. Analyzing one company from start to finish

Footnotes

  1. SEC Investor.gov, Stocks — FAQs. Ownership, ordinary shareholder rights, and investment risks; specific rights depend on the security and jurisdiction. ↩

  2. SEC, Beginners' Guide to Financial Statements. Basic relationships among assets, liabilities, equity, and financial statements. ↩

  3. Aswath Damodaran, NYU Stern, Valuation. Distinguishing firm and equity valuation. ↩

Sources

articleStocks — FAQsSEC Investor.govarticleBeginners' Guide to Financial StatementsSECarticleValuationAswath Damodaran, NYU Stern

Related notes

Two independent verification paths recombining inside a valuation range while a failed fragment falls beyond an exit boundaryFinancial Statements to Stock Valuation02. Reading the financial statements togetherReconcile the same transactions across profit, the balance sheet, and cash flow.Two independent verification paths recombining inside a valuation range while a failed fragment falls beyond an exit boundaryFinancial Statements to Stock Valuation03. Why profit can fall while revenue growsSeparate revenue recognition and costs to explain falling profit amid growth.Two independent verification paths recombining inside a valuation range while a failed fragment falls beyond an exit boundaryFinancial Statements to Stock Valuation04. Why a profitable company can run short of cashFollow receivables, inventory, and payables from reported profit to operating cash.

This is a personal research note, not investment advice