There's an old saying that it takes money to make money. Some might suggest otherwise; but if we look at a company's balance sheet, we find that, more often than not, this statement is true.
That's because companies often have to issue stock in order to start, fund, or grow a business. It's something that's known as paid-in capital, which is the amount of money that investors have directly invested in the company through either the purchase of common or preferred stock. (To start purchasing stocks today, visit our broker center.)
Paid-in capital formula
It's pretty easy to calculate the paid-in capital from a company's balance sheet. The formula is:
Stockholders' equity-retained earnings + treasury stock = Paid-in capital
In order to find the right numbers to plug in, an investor simply needs to head over to the equity section of a company's balance sheet and find those three numbers. Using a real-world example, here's a snapshot of the shareholder's equity section of Halliburton's (NYSE: HAL) balance sheet:
To calculate Halliburton's paid-in capital, take its stockholder equity ($16,267) minus its retained earnings ($21,809), which is then added to the amount of Treasury stock ($8,131). One thing that's worth noting about the treasury stock is that, while it's a negative on the balance sheet because it reduces shareholder equity, it's a positive value in our formula because it represents the amount of stock a company has repurchased with retained earnings.
Here's the outcome from that formula:
$16,267-$21,809 + $8,131 = $2,598
In other words, Halliburton investors have plowed nearly $2.6 billion into the company in order to fund its ability to make money on their behalf.
Paid-in capital equation
In addition to that formula, there's one other way to calculate the paid-in capital. There's a two-step equation where we first subtract retained earnings from total stockholders' equity, and then add treasury stock to that result to calculate total paid-in capital. Here's that equation using our real-world Halliburton example:
1. $16,676-$21,809 = -$5,533
2. -$5,533 + $8,131 = $2,598 (Paid-in capital)
We get the same result, with just a slightly different method.
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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.