Part 2 · Balance sheet: the company's list of assets · Lesson 9
Equity: Shareholders' stake and capital impairment
Equity is the part of a company's assets that belongs to shareholders. It grows as profits accumulate, and as losses accumulate it shrinks and can eat into share capital itself, a state called 'capital impairment'.
QToday's question
A company priced at KRW 1,000 per share, one priced at KRW 100,000, and one in the news for 'capital impairment'. What should you look at to tell whether the shareholders' stake in a company is solid?
On the balance sheet scale, what remains after subtracting liabilities is the shareholders' stake, equity. Equity grows when the company makes a profit and shrinks when it takes losses. If losses pile up too far, you reach a state where even the money shareholders originally put in has been used up, and that is called 'capital impairment'. In this lesson you work through it step by step, from the makeup of equity to capital impairment.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 6 you learned assets = liabilities + equity, and in Lesson 8 the types of liabilities. This lesson covers the last pan of the scale, equity. The 'net income → retained earnings' link you saw in Lesson 1 now gets real use. You saw in Lesson 5 that the balance sheet and statement of changes in equity are in 'III. Financial Matters' of the annual report. P/B, which is calculated from equity, connects to Economics Lesson 37.
- STEP 1 · Basic conceptThe three components of equity
Say where the money in , , and each came from.
- STEP 2 · Understanding the mechanicsHow retained earnings move
Follow, through the statement of changes in equity, how net income increases retained earnings and dividends reduce them, and reconcile beginning and ending retained earnings yourself.
- STEP 3 · Applying itCapital impairment and exchange criteria
Calculate the ratio and explain how impairment of 50% or more or full impairment connects to administrative issue designation and delisting.
STEP 1The three components of equity
Imagine you opened a bakery with friends. The money you put in at first, the money that came in later at a higher price, and the money you earned by running the business. Equity is the shareholders' vault holding these three kinds of money.
Equity is 'money you don't have to pay back'
In Lesson 8 we said liabilities are other people's money that must be repaid someday. Equity is the opposite: it is the shareholders' money, so the company has no obligation to repay it. In return, if the company does well the shareholders' stake grows, and if it fails they take only what is left after all debts are paid. That is why equity is also called the 'residual interest'. The calculation is simple: equity = assets − liabilities. Robin Bakery (fictional) has assets of KRW 10 billion; subtracting liabilities of KRW 4 billion gives equity of KRW 6 billion.
Three components: share capital, capital surplus, retained earnings
is the set per share multiplied by the number of shares issued. Robin Bakery issued 2 million shares with a par value of KRW 500, so share capital is KRW 1 billion. Par value is a bookkeeping number unrelated to the share price, so do not confuse it with the KRW 9,000 share price.
But companies usually sell shares for more than par value. When listing or doing a paid-in capital increase, if a KRW 500 par share is sold for several thousand won, the portion above par value is recorded as (share premium). Robin Bakery's capital surplus is KRW 1.5 billion. Share capital and capital surplus are money shareholders put in.
are money the company earned and accumulated. Each year's net income, after dividends are paid out, builds up in this line, and a loss reduces it. Robin Bakery's retained earnings are KRW 3.5 billion, the largest line of its KRW 6 billion of equity. In addition, the company's own shares that it has bought () are recorded as a deduction from equity, and there are lines that hold some valuation gains and losses, but to start with it is enough to remember the three lines.
See it: Robin Bakery's equity blocks
Tap the equity blocks on the right one by one. An explanation of where that money came from appears.
Assets KRW 10 billion
Liabilities + equity KRW 10 billion
Robin Bakery is a fictional company for teaching. Block heights are roughly proportional to the amounts.
Dividing equity by the number of shares gives the shareholders' share per share. This is (book value per share); for Robin Bakery it is KRW 6 billion ÷ 2 million shares = KRW 3,000. The , the KRW 9,000 share price divided by BPS, is 3x. The 'share price relative to assets' of PBR that you saw in Economics Lesson 37 is based on exactly this equity.
Quick checkIf Robin Bakery issues 100,000 new shares with a par value of KRW 500 at KRW 9,000 per share, by how much do share capital and capital surplus each increase?
STEP 2How retained earnings move
Of the three components of equity, retained earnings is the one that moves the most each year. Follow the paths in and out, and the 'net income → equity' link you saw in Lesson 1 shows up in numbers.
Net income comes in, dividends go out
The net income at the bottom of the income statement belongs to the shareholders. The company pays out part of this profit as dividends and keeps the rest for next year's business. The place where retained profit accumulates is retained earnings. So retained earnings move according to the formula beginning retained earnings + net income − dividends = ending retained earnings. If the company makes a loss, a negative goes in the net income slot and retained earnings fall.
Robin Bakery (fictional) had retained earnings of KRW 2.6 billion at the start of this year. Over the year it earned net income of KRW 1.2 billion and paid dividends of KRW 150 per share, KRW 300 million in total. Year-end retained earnings are then 26 + 12 − 3 = KRW 3.5 billion. The 'dividends −KRW 300 million' under financing in the cash flow statement in the Lesson 1 summary table is exactly this money, and the payout ratio is 3 ÷ 12 = 25%.
The statement of changes in equity records these movements
The , which Lesson 1 introduced as the 'comparison table with the previous checkup', is the table that records this movement line by line. Across the columns are the lines of equity such as share capital, capital surplus, and retained earnings, and down the rows are events such as opening balance, net income, dividends, paid-in capital increases, and treasury stock purchases. So if equity suddenly rose, you can tell from this one statement whether it was due to profit or a capital increase, and if it fell, whether it was due to a loss or to dividends and buybacks.
See it: a year of retained earnings
Press the buttons to change the scenario. They show how retained earnings differ for the same company depending on profit and dividends.
Fictional company calculation. Unit: KRW 100 million.
Common misconceptions
- "Retained earnings of KRW 3.5 billion means there is KRW 3.5 billion of cash in the vault?"
- No. Retained earnings is only a bookkeeping record that 'earned money was kept'; that money may already have been turned into assets such as ovens, stores and inventory. Actual cash is found in cash and cash equivalents on the balance sheet (KRW 800 million for Robin Bakery).
- "A company with large share capital is a sturdy company?"
- Share capital is par value × number of shares, so it is not directly tied to a company's size or strength. If par value is split (stock split) or combined, the makeup of share capital stays the same and only the share count changes. Sturdiness is judged by total equity, and by whether retained earnings within it keep accumulating steadily.
- "Paying a lot of dividends increases equity?"
- The opposite. Dividends leave retained earnings and go into shareholders' hands, so the company's equity falls. For shareholders as a whole, it is only a difference between leaving the money in the company and holding it in their own hands.
Quick checkIf Robin Bakery, with beginning retained earnings of KRW 3.5 billion, earns net income of KRW 1 billion next year and pays KRW 400 million in dividends, what are ending retained earnings?
STEP 3Capital impairment and exchange criteria
We said retained earnings fall when there are losses. What happens if those losses continue for several years? Follow in numbers how the shareholders' vault runs dry.
When the accumulated deficit reaches down to share capital, that is capital impairment
When losses accumulate and retained earnings turn negative, it is called an accumulated deficit. The deficit first wipes out the profit the company has saved, then eats into the capital surplus that shareholders put in, and finally reaches down to share capital. The state where total equity becomes smaller than share capital is called . It means that even the principal shareholders originally put in has been reduced by losses.
How much has been eroded is measured by the . The Korea Exchange calculates it as (share capital − total equity) ÷ share capital, using consolidated financial statement figures if there are subsidiaries. If total equity is smaller than share capital but still positive, it is partial capital impairment; if total equity falls to zero or below, it is full capital impairment (complete erosion of equity). Full capital impairment also means that even selling all assets would not repay the debts.
See it: the equity bucket
Pick a company and move the yearly loss and the number of consecutive loss years. The moment the water drops below the share capital line, it is capital impairment. Assume no rights offering or dividends.
This is a fictional company calculation. The wording of the verdicts simplifies the fiscal year-end criteria of the KOSPI market; actual designation depends on the audit report and exchange review.
How the exchange treats capital impairment
For a listed company, capital impairment is not just a number. The Korea Exchange listing rules make capital impairment a ground for administrative issue designation and for delisting. The KOSPI market criteria are as follows.
| Situation (KOSPI market) | Result |
|---|---|
| Capital impairment ratio of 50% or more at the end of the latest fiscal year | Designation as an |
| Share capital fully impaired at the end of the latest fiscal year | Ground for delisting |
| Capital impairment ratio of 50% or more for two consecutive years | Listing eligibility review |
| Share capital fully impaired at the latest half-year end | Listing eligibility review (applies from half-year ends falling on or after Jun 1, 2026) |
Source: Korea Exchange listing disclosure system, guide to 'Administrative Issue Designation and Delisting Criteria' (KOSPI market, checked Oct 8, 2026); FSC press release (May 13, 2026). On the KOSDAQ market, a capital impairment ratio of 50% or more, or equity below KRW 1 billion, is a ground for administrative issue designation, and full impairment is a ground for formal delisting (Korea Exchange KOSDAQ year-end closing guide, Feb 2, 2026).
Once a company becomes an administrative issue, a warning label is attached for investors and trading is restricted, for example margin trading (buying with borrowed money) is prohibited. So a company pushed toward capital impairment takes action before the fiscal year-end arrives. There are two typical methods. One is a . For example, if a fictional company with share capital of KRW 10 billion and total equity of KRW 1 billion (impairment ratio 90%) reduces share capital to KRW 1 billion, it can write off the deficit by the amount reduced, bringing the impairment ratio to 0%. No new money comes in; it is a cleanup of the books, so the number of shares shareholders hold shrinks sharply. The other is receiving new money through a paid-in capital increase to raise equity, which dilutes existing shareholders' ownership. You can calculate the degree of dilution with the Rights Offering and CB Dilution Calculator.
Finding it yourself in DART: look in three places for equity
The screen below is from the annual report (filed Mar 11, 2025) of the large listed company opened in Lesson 3. It is only an example for finding your way around and is not an investment recommendation.
123- 1I. Company Overview → 3. Changes in Share Capital: shows when and how share capital changed through capital increases and reductions.
- 2III. Financial Matters → 2-1. Consolidated Balance Sheet: in the equity section below liabilities, look at share capital, capital surplus, retained earnings (deficit) and total equity.
- 32-4. Consolidated Statement of Changes in Equity: check line by line how net income, dividends, capital increases and treasury stock moved equity.
Source: FSS DART, annual report table of contents screen (captured Oct 2026).
How to use it in investing
| If you see these numbers or disclosures | Check it like this |
|---|---|
| Retained earnings rise steadily every year | A company that makes profits and keeps part of them. Check whether they rose alongside dividends |
| 'Deficit' appears where retained earnings should be | A state of accumulated losses. Compare total equity with share capital to calculate whether there is impairment |
| Equity rose but there is no profit | In the statement of changes in equity, check whether it is due to a rights offering or CB conversion (ownership dilution) |
| Disclosures such as 'Decision on capital reduction' or 'Occurrence of administrative issue designation grounds at internal closing' | May be a measure to resolve capital impairment. Check changes in the share count and any follow-up capital increase plans |
Not always. Biotech companies that invest in R&D for a long time, and early-stage companies, may be listed with a large accumulated deficit. The capital impairment ratio is only a number that signals risk; it does not determine the company's future. This lesson does not recommend buying or selling any particular stock.
Quick checkFor a KOSPI-market company with share capital of KRW 4 billion and total equity of KRW 1.2 billion, what is the capital impairment ratio, and what action would apply if these were fiscal year-end numbers?
✓What we learned today
- Equity is the shareholders' stake, assets minus liabilities. For Robin Bakery (fictional), share capital KRW 1 billion + capital surplus KRW 1.5 billion + retained earnings KRW 3.5 billion = equity of KRW 6 billion.
- Share capital is par value × shares issued (KRW 500 × 2 million shares = KRW 1 billion), capital surplus is the extra money received by issuing shares above par value, and retained earnings is profit the company earned and accumulated without paying it out as dividends.
- Retained earnings rise by net income and fall by dividends. For Robin Bakery, beginning KRW 2.6 billion + net income KRW 1.2 billion − dividends KRW 300 million = ending KRW 3.5 billion.
- When losses pile up and total equity becomes smaller than share capital, it is capital impairment. Capital impairment ratio = (share capital − total equity) ÷ share capital, and if total equity is zero or below, it is full capital impairment (total erosion of equity).
- In the KOSPI market, a capital impairment ratio of 50% or more at fiscal year-end makes a company an administrative issue, and full impairment is a ground for delisting. Companies with capital impairment often move on to capital reductions and rights offerings, which can be a burden on existing shareholders.
Now that you have seen assets, liabilities and equity, it's time to divide these numbers against each other. The next lesson teaches how to gauge at a glance how sturdy a company is with ratios such as the debt-to-equity ratio and the current ratio.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Robin Bakery issued 2 million shares with a par value of KRW 500. What is its share capital?
Share capital is par value × shares issued. KRW 500 × 2 million shares = KRW 1 billion. It is a different number from the KRW 9,000 share price or the KRW 6 billion total equity.
Q2. With beginning retained earnings of KRW 2.6 billion, net income of KRW 1.2 billion and dividends of KRW 300 million, what are ending retained earnings?
Beginning retained earnings + net income − dividends = 26 + 12 − 3 = KRW 3.5 billion (in units of KRW 100 million). Net income accumulates, and dividends go out to shareholders and are deducted.
Q3. What state does capital impairment describe?
Capital impairment is when losses pile up and total equity falls below the share capital shareholders first put in. Having a lot of debt alone is not capital impairment.
Q4. What is the capital impairment ratio of a company with share capital of KRW 5 billion and total equity of KRW 2 billion?
(Share capital − total equity) ÷ share capital = (50 − 20) ÷ 50 = 60%. In the KOSPI market, 50% or more at fiscal year-end is a ground for administrative issue designation.
Q5. If a company does a 'free capital reduction' (reduction without compensation) to resolve capital impairment, what happens to existing shareholders?
A free capital reduction cuts share capital to erase the accumulated deficit on the books. No new money comes in, and shareholders' share counts shrink. That is why a rights offering often follows a capital reduction.
NextTerms · Next lesson · Related tools
A table showing what a company owns on a particular day (usually the end of the fiscal year) and the sources of the money that paid for those assets, liabilities and equity. Assets = liabilities + equity always holds.
Share capitalShare capitalThe par value of a share × the number of shares outstanding. If total equity falls below share capital, it is capital impairment.
Capital surplusCapital surplusSurplus arising from transactions with shareholders, such as the extra money received by issuing shares above par value (share premium).
Retained earningsRetained earningsThe portion of the net income a company has earned that has been kept rather than paid out as dividends and the like. It is shown within equity on the balance sheet.
Statement of changes in equityStatement of changes in equityA table showing how equity, the shareholders' stake, changed over a period through net income, dividends, capital increases, treasury stock transactions and so on.
Par valuePar valueThe bookkeeping amount set for one share. It has nothing to do with the share price; par value × shares issued becomes share capital.
Capital impairmentCapital impairmentA state in which accumulated losses have made total equity smaller than share capital. If total equity is zero or below, it is full capital impairment.
Capital impairment ratioCapital impairment ratio(Share capital − total equity) ÷ share capital × 100. The Korea Exchange calculates it on a consolidated basis, and in the KOSPI market 50% or more at fiscal year-end is a ground for administrative issue designation.
Treasury stockTreasury stockThe company's own shares that it has bought and holds. It is recorded as a deduction from equity.
Administrative issueAdministrative issueA stock designated by the exchange because it meets a listing-rule condition such as capital impairment, failure to file a periodic report, or an audit opinion shortfall. Trading is restricted, for example margin trading is prohibited, and if the cause isn't resolved it can lead to delisting.
Capital reductionCapital reductionReducing share capital. A free capital reduction (without returning money) cuts share capital to wipe out accumulated deficits, and shareholders' share counts fall.
BPS (Book value Per Share)Book value Per ShareThe company's net assets (assets − liabilities) divided by the number of shares outstanding. Dividing the share price by BPS gives PBR.
P/BPrice-to-Book RatioShare price ÷ book value per share (BPS). It shows how many times the company's book net assets the stock trades at.
EPSEarnings Per ShareNet income ÷ number of shares outstanding. The profit one share earned in a year.
Put what you learned to use right away
Learn (Economics) · P/E and P/B→Rights Issue/CB Dilution Calculator→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.