Stated Capital

Stated Capital (also known as 'Legal Capital') is an accounting figure that represents the nominal value of a company’s issued shares. Think of it as a historical artifact on the balance sheet. Its value is calculated by multiplying the par value of a share—an often tiny, arbitrary amount like $0.01—by the total number of shares the company has issued. The primary, old-school purpose of stated capital was to create a legal minimum cushion of equity that couldn't be paid out to shareholders as dividends. This was meant to protect a company's creditors by ensuring a small pot of capital remained in the business. However, in modern finance, especially with the prevalence of no-par value stock (shares with no assigned par value), the concept of stated capital has become largely ceremonial. It offers very little insight into a company's operational health, profitability, or true market worth.

Understanding stated capital is mostly about understanding its relationship with par value and how the money you pay for a stock is recorded on a company's books.

At its core, stated capital is a simple multiplication:

• Stated Capital = Par Value per Share x Number of Issued Shares

The par value is a face value assigned to a stock in the corporate charter, and it has almost no connection to the stock's actual market price. Decades ago, it represented the minimum price at which a share could be sold, but that's no longer the case. Today, it’s typically a minuscule amount set purely for legal and accounting purposes.

Let's say “Capipedia Corp.” decides to go public and issues 10 million shares. The company sets a par value of $0.01 per share.

• Its Stated Capital would be: $0.01 x 10,000,000 = $100,000.

Now, you, the savvy investor, decide to buy 100 of these shares during the IPO at the offering price of $30 per share. You pay $3,000. Here’s how Capipedia Corp. records your investment on its balance sheet under shareholders' equity:

• Stated Capital: The par value portion of your investment (100 shares x $0.01) contributes $1 to this account.
• Additional Paid-in Capital (APIC): The amount you paid above the par value, which is $2,999 ($3,000 - $1), goes into this account.

The company receives the full $3,000 in cash, but it's split between these two equity accounts. This shows that the stated capital is just a sliver of the actual capital raised.

For a value investor, the short answer is: it doesn't, really. It's a legal formality, not a useful metric for assessing a company's worth.

The concept of stated capital is a holdover from an era when corporate law was less developed. The idea was to prevent a reckless board from liquidating the company by paying out all its capital to shareholders, leaving creditors with an empty shell. By designating a portion of capital as “stated,” it was legally locked in the company. Today, creditor protections are far more robust and are governed by modern corporate laws and debt covenants. The distinction between stated capital and other equity accounts has become largely irrelevant for analyzing a business.

A value investor's time is precious. Instead of getting bogged down in archaic terms like stated capital, you should focus your attention on the parts of the balance sheet and income statement that reveal a company's true economic engine. Look for:

• Retained Earnings: This shows the cumulative profits the company has reinvested back into the business over its entire life. It’s a powerful indicator of long-term value creation.
• Book Value: Also known as Net Asset Value, this is the company's total assets minus its total liabilities. It gives you a baseline for the company’s net worth.
• Free Cash Flow: This is the cash a company generates after covering its operating expenses and capital expenditures. It’s the lifeblood of a business and what ultimately funds growth, dividends, and share buybacks.

In summary, when you see “Stated Capital” on a balance sheet, you can safely acknowledge it as a historical footnote and move on to the metrics that actually tell the story of the company's value.