What Is Internal Common Equity?

by Marquis Codjia; Updated September 26, 2017

External financiers often pour money into a business after corporate leadership reassures them about the company's positive long-term prognosis. Beyond this explicit promise of increased revenue, investors also delve into other reports to make sure company principals are not overly optimistic. They pore over income statements and equity reports, of which internal common equity is a component.

Definition

A company's internal common equity is money the business has kept in its coffers since its inception, generally to cope with a bad economy or withstand a potential shock on credit markets. Financial commentators use the terms "internal common equity," "retained earnings" and "accumulated profits" interchangeably. In essence, retained earnings represent cash the business has not doled out as dividends over the years. For a company, maintaining a sufficient level of internal common equity is often an exercise in financial acrobatics. This is because the organization must keep enough money to survive if the economy turns sours, yet distribute sufficient dividends to keep shareholders happy.

Relevance

In a modern economy in which cash is often synonymous with financial soundness, a company sketches an effective strategy to gradually raise its internal common equity. The essential principles of this outline include fostering revenue growth, cutting costs and reining in waste; shedding nonperforming business units; and constantly seizing investment opportunities to increase non-operating, ancillary revenues -- such as gains from stock and bond transactions. Obviously, the whole conversation about internal common equity focuses on revenue and profit management, which are the main tenets of corporate management's long-term vision.

Competitive Implications

Security-exchange players are more likely to jump on the bandwagon of a company that consistently hoards increased amounts of internal common equity. They also may come out in support of top leadership's long-term goals if they clearly see that senior executives will use the extra cash to turn the business around, make more money in the process and take the organization to the competitive pole position. If the business is truly profitable, investors may compete to see who can be most vociferous in supporting the organization. They typically do so by bidding up the company's shares on securities exchanges, such as the New York Stock Exchange and London Stock Exchange.

External Common Equity

External common equity is money a company raises in securities exchanges or through private conduits. Here the key word is "external," which denotes the fact that it's not cash the business has generated on its own. External common equity holders, or shareholders, have rights and privileges -- the most important of which include receiving periodic dividends, making money when share prices rise and voting on key corporate matters.

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.