Shareholder equity

    0
    742

    Shareholder equity represents the net worth of a company i.e. what is left after all debts have been paid. Whatever remains will show the proportion of the company that is owned by shareholders and how the company is financed through common and preferred shares, as well as other components.

    Shareholder equity can come from capital directly invested by shareholders or from net income generated by the company for reinvestment (also known as ‘retained earnings’).

    Shareholder equity is also known as ‘stockholder’s equity’, ‘share capital’ and ‘net worth’.

    To learn more about financial performance ratios, read our lesson:

    How is shareholder equity calculated?

    Shareholder equity is usually calculated by subtracting a company’s total liabilities from its total assets:

    Shareholder equity = total assets – total liabilities

    Total assets will need to take account of both current assets (e.g. cash flow) and long-term assets (such as property or machinery), and total liabilities will also need to take account of both short and long-term liabilities. This equation is considered to be a relatively simple way to work out a company’s net worth.

    Alternatively, shareholder equity can be calculated by adding share capital and retained earnings and then subtracting treasury shares:

    Shareholders equity = share capital + retained earnings – treasury shares

    This equation is slightly more complicated and involves finding out the retained earnings for the company. Treasury shares are shares which are sold and then bought back by the company.

    To work out a company’s shareholder equity, you can use its most recent annual report.