Introduction

In the financial industry, especially for licensed corporations like securities firms, three numbers are particularly important – paid-up share capital, net asset value, and liquid capital. These three numbers are like the foundation, walls, and cash reserves of a house, all essential. Today, we’ll use simple language and examples to help everyone understand how these three concepts affect the health of financial institutions, and the relationships between them.

Paid-up Share Capital: The Foundation of a Company

Restaurant Example

When Mr. Zhang opened the “Delicious House” restaurant, he and other shareholders contributed a total of 1 million dollars. This 1 million is the restaurant’s paid-up share capital, the money that shareholders have actually paid. Whether the restaurant makes or loses money afterward, this figure remains 1 million on the books, unless the company deliberately changes it (such as through capital increases or share buybacks).

Financial Institution Example

When “Prosperity Securities” was established, investors contributed a total of 50 million dollars. This money is the securities firm’s paid-up share capital, the capital base registered with regulatory authorities. Regulators require this figure to reach a certain level before certain types of business can be conducted.

Net Asset Value: The Actual Value of a Company

Restaurant Example

After “Delicious House” opened, they purchased kitchen equipment, tables and chairs, renovations, and had some cash as working capital. If we calculate:

• Total assets: 1.2 million (equipment, renovations, inventory, cash)
• Total liabilities: 300,000 (bank loans, accounts payable)
• Net asset value = 1.2 million – 300,000 = 900,000

This figure changes with the restaurant’s operating conditions. If the restaurant makes money, the net asset value increases; if it loses money, the net asset value decreases.

Financial Institution Example

“Prosperity Securities” has assets including offices, equipment, investments, receivables, and bank deposits, totaling 80 million dollars. Liabilities include loans, accounts payable, and client deposits, totaling 30 million dollars.

• Net asset value = 80 million – 30 million = 50 million dollars

Liquid Capital: The Safety Cushion of a Company

Restaurant Example

If “Delicious House” were to calculate liquid capital (generally not required for restaurants, this is purely for example), they would calculate adjusted current assets minus current liabilities:

• Cash: 300,000 (counted in full)
• Inventory: 100,000 (might only count half, as it’s not immediately convertible to cash)
• Current liabilities: 100,000
• Liquid capital = 300,000 + 50,000 – 100,000 = 250,000

Financial Institution Example

For licensed corporations like “Prosperity Securities,” liquid capital is a key regulatory indicator:

• Bank deposits: 35 million (counted in full)
• Receivables from clients: 15 million (might be discounted, e.g., counted at 80%)
• Current liabilities: 20 million
• Liquid capital = 35 million + 12 million – 20 million = 27 million

The Securities and Futures Commission requires securities firms to maintain a certain level of liquid capital to ensure sufficient liquidity to handle market fluctuations and client withdrawals.

Relationships Between the Three

Paid-up Share Capital and Net Asset Value

Paid-up share capital is the money initially invested, while net asset value includes paid-up share capital plus (or minus) the company’s accumulated profits (or losses). So net asset value = paid-up share capital + accumulated profits (or – accumulated losses).

Like in the “Delicious House” example, the paid-up share capital is 1 million, but the net asset value is only 900,000, indicating the restaurant has lost 100,000.

Net Asset Value and Liquid Capital

Net asset value is the overall value of the company, including long-term assets; while liquid capital primarily focuses on liquidity and short-term solvency. Like “Prosperity Securities” with a net asset value of 50 million, but liquid capital of only 27 million, because some assets are long-term investments not counted in liquid capital.

Paid-up Share Capital and Liquid Capital

Paid-up share capital is a long-term stable source of funding. Increasing paid-up share capital usually increases liquid capital (because it increases cash). Conversely, if a company uses liquid capital to buy long-term assets, liquid capital decreases, but paid-up share capital doesn’t change.

Conclusion

These three numbers are very important for licensed corporations:

• Paid-up Share Capital is the initial investment, representing shareholders’ commitment
• Net Asset Value reflects the company’s actual value, including operating results
• Liquid Capital is a safeguard for daily operations, ensuring sufficient liquidity for unforeseen circumstances

Understanding the relationships and impacts of these three concepts is very important for financial institution management, investors, and regulators. It’s like different indicators in a physical examination, collectively reflecting the health of the business.

Whether opening a restaurant or operating a securities firm, these three financial indicators are key to assessing business stability. The difference is that financial institutions face stricter regulatory requirements, especially regarding liquid capital, as this concerns investor fund safety and market stability.