Capital Impairment, a Company's 'Internal Illness' Every Investor Must Know
[Capital Impairment] A Company's 'Internal Illness'
Among the indicators of a company's financial status, capital impairment is one that investors should pay close attention to. It is a sign that there is a serious problem with the company's financial structure, meaning its fundamental health is deteriorating, much like a person suffering from an internal illness. In this post, we'll take a detailed look at what capital impairment is, why it's dangerous, and how investors should interpret this metric.
Capital Impairment: A Company's 'Internal Illness' and What Investors Need to Know
1. What is Capital Impairment?
Capital impairment refers to a state where a company's total equity (paid-in capital, retained earnings, etc.) becomes less than its paid-in capital due to accumulated losses. In simple terms, it's a situation where a company is eating into the capital that was initially raised to start the business.
- Paid-in capital: The money that shareholders initially invested in the company.
- Total equity: The sum of all a company's equity, including paid-in capital, capital surplus, and retained earnings.
In this case, if the total equity is greater than the paid-in capital, it means the company is making good profits. However, if the total equity becomes less than the paid-in capital, capital impairment has occurred. The capital impairment ratio is an indicator of how severe this figure is, and if total equity becomes 0, it is called full capital impairment.
2. Why is Capital Impairment Dangerous?
Capital impairment signifies that a company's fundamental financial health has been compromised. This state can lead to the following serious consequences:
- Delisting Risk: The Korea Exchange designates listed companies with a capital impairment ratio exceeding 50% or those that have been in a state of full capital impairment for two consecutive years as a management issue or a subject for substantive delisting review. This means that investors could incur significant losses.
- Credit Rating Decline: A state of capital impairment makes it difficult to borrow from financial institutions and has a negative impact on attracting investment.
- A Signal of Deteriorating Management: Capital impairment is not just a financial problem; it is also evidence that a business's profitability is low or its management efficiency is poor. This raises questions about the company's sustainability.
3. How Should Investors Judge Capital Impairment?
Capital impairment can be verified through a company's financial statements, specifically the statement of financial position.
- Total Equity < Paid-in Capital: If this relationship holds true, capital impairment has occurred.
- Calculating Capital Impairment Ratio: (Paid-in Capital - Total Equity) / Paid-in Capital X 100(%)
However, being in a state of capital impairment is not always dangerous. In the case of a startup, it may temporarily fall into capital impairment while attracting initial investment. If its future growth potential is high, this could even be an investment opportunity. What is important is to understand the cause and trend of the capital impairment. You need to carefully examine whether it's due to a one-time expense or if long-term losses are accumulating due to a structural problem.
How to Check for Capital Impairment
- Electronic Data Gathering, Analysis, and Retrieval (EDGAR): You can check the financial statements of all listed companies.
- Securities firm HTS/MTS: You can easily view financial statements in the company analysis menu.
4. How to Resolve Capital Impairment
Companies make various efforts to resolve capital impairment.
- Capital Increase (Issuance of New Shares): A method of increasing paid-in capital by issuing additional shares. The company may ask existing shareholders for additional investment or raise new investors.
- Capital Reduction: A method of reducing paid-in capital by decreasing the number of shares or lowering the par value. This has the effect of lowering the capital impairment ratio but can result in losses for shareholders.
- Profit Generation: The most fundamental solution is for the company to make a profit from its main business. As profits accumulate, retained earnings increase, which boosts total equity and allows the company to emerge from a state of capital impairment.
5. Conclusion: Understanding Capital Impairment, the First Step in Risk Management
Capital impairment is a clear warning sign of a company's financial distress. For listed companies in particular, changes in the capital impairment ratio directly affect stock prices, making it an important indicator that investors must understand. The wise investor's attitude is to not just look at the numbers but to analyze the cause of the capital impairment and evaluate the company's potential for recovery.
Key Summary:
Capital impairment is a signal of a company's deteriorating financial health. It is crucial to check financial statements before investing to identify if capital impairment exists and what its cause is.
The content of this blog is for reference in investment judgment only, and investment decisions should be made based on individual judgment and responsibility. In no event shall the information in this blog be used as legal evidence for investment outcomes.
댓글
댓글 쓰기