In finance, equity is ownership of assets that may have debts and/or other liabilities attached to them. Shareholders equity is what the corporation owners (shareholders in the case of public company) can claim as ownership from the company after all of the debts of the company have been paid. In accounting terms shareholders equity is the difference between total assets and total liabilities. Another way to define shareholders equity is as share capital plus retained earnings. The two main sources of shareholders equity are the money original invested in the company plus all the other investments made after the initial investment and the second source is the retained earnings that the company has retained over the period.
The equity of a public company can usually be found on the company balance sheet and it is one of the most common metrics that investor can use to assess the financial health of a business.
A simple example of what equity is if someone owns a car that is worth $15000 and owes $5000 on the car loan used to buy the car, then the difference of $10000 is this person equity in the car.
The shareholders equity can be found on the balance sheet of a company report. The formula for calculating shareholders equity is:
Shareholders Equity = Total Assets - Total Liabilities
The total assets and total liabilities can be found on the balance sheet of the company.
Book value can be extraordinarily useful in estimating the quality of a business. The shareholders equity is representation of the real value of the company and we can use this value to asses the quality of the business. One of the most popular measurements of business quality is Return on Equity.
Shareholders equity can be positive or negative number. If the shareholders equity is a positive number that means that the company can meet its liabilities. If the number is negative, that means that the company is can’t cover its liabilities and if this situation last longer it usually leads to bankruptcy. For some businesses, shareholders equity is very informative of the economic condition of the company. For others, book value on the balance sheet carries much less meaning. This is highly dependent on the business model and different industries and sectors the companies are operating.