Perhaps financial accounting and reporting is the only discipline in which the word "capital" has many meanings. Although interrelated, these interpretations often refer to completely distinct concepts. Experienced investors and astute financial statement readers can tell which capital considerations matter and use them to make asset allocations and long-term funding schemes.
Financial Statement
A financial statement includes many of the features the public and regulators want to see in a corporate performance data -- clear and accurate financial reporting, completeness and transparency in the way a business reports its information and compliance with accounting norms and regulatory guidelines. A full set of financial statements includes a statement of financial position, a report on profit and loss, a statement of cash flows and a statement of shareholders' equity. "Balance sheet," "statement of financial condition" and "statement of financial position" are identical terms.
Shareholders' Capital
Shareholders' capital, also called owners' equity or shareholders' equity capital, is a balance sheet item. It represents the company's net worth, or its assets minus its liabilities. Growing shareholders' capital requires that a company cultivate deep and tight ties with external financiers, a process that generally spans many years. Dividend payments and stock buybacks reduce shareholders' capital, whereas share issuance props it up.
Retained Capital
Financial managers and accountants use the terms "retained earnings," "retained capital" and "accumulated profits" interchangeably. Retained capital refers to income that a business has accumulated over the years, minus all losses it has incurred along the way. A mark of financial stability, retained capital represents the firm's economic war chest.
Capital Assets
Capital assets are also referred to as long-term resources, fixed assets or tangible assets. These are items a company relies on to operate for a period exceeding one year. Examples include equipment, land, commercial buildings and factory machinery -- a hodgepodge of items that accountants group under the acronym PPE, or "property, plant and equipment." In contrast, short-term assets serve in corporate processes for less than 12 months. Examples include accounts receivable, inventories and marketable securities -- such as stocks and bonds.
Working Capital
Working capital is an accounting ratio that provides pointed information about a firm's short-term liquidity. To calculate this metric, accountants rely on two balance sheet items -- current assets and short-term liabilities. Working capital measures how much cash the business will have in the next 12 months and whether it will be able to repay its current debts. It equals short-term resources minus short-term liabilities.
Capital Structure
In financial-statement terminology, capital structure refers to the various products a business uses to fund its operations. For example, a company's capital structure may reveal that the organization's money comes from the following sources: 60 percent of assets, 25 percent of debt and 15 percent of shareholders' capital.
