Shareholder Equity Ratio

Loading the player...

What is the 'Shareholder Equity Ratio'

The shareholder equity ratio determines how much shareholders would receive in the event of a company-wide liquidation. The ratio, expressed as a percentage, is calculated by dividing total shareholders' equity by total assets of the firm, and it represents the amount of assets on which shareholders have a residual claim. The figures used to calculate the ratio are taken from the company balance sheet.

Shareholder Equity Ratio

BREAKING DOWN 'Shareholder Equity Ratio'

The balance sheet is based on a formula: assets less liabilities equals equity. If, for example, a company sold all of its assets for cash and used the cash to pay off all liabilities, any remaining cash equals the firm's equity. A company's shareholders' equity is the sum of common stock, additional paid in capital and retained earnings, and the balance is considered to be the true value of a business.

The Differences Between Additional Paid in Capital and Retained Earnings

Shareholders' equity can increase when a firm issues more common stock, because that affects both the common stock and the additional paid in capital accounts. Assume, for example, that XYZ firm issues 1,000 shares of $10 par value common stock for $30 a share. Common stock is increased based on the par value of each share, or $10,000, and additional paid in capital is increased by the remaining $20 per share ($20,000).

When a company generates net income, those profits increase the retained earnings in the shareholders' equity section of the balance sheet. At the end of each month, the net income in the income statement is adjusted to zero, and the total is posted to retained earnings. The retained earnings balance is the sum of all net income since inception less all cash dividends paid since the firm started.

How a Company Liquidation Takes Place

When a business chooses to liquidate, all of the company assets are sold, and the creditors and the shareholders have claims on assets. Secured creditors have the first priority, based on the specific assets that serve as collateral for a debt. Other creditors, such as bondholders, are next in line to claim assets, followed by the shareholders. Preferred shareholders have priority over common shareholders when a company chooses to liquidate. A larger asset balance means that shareholders are more likely to receive some assets during the liquidation. However, there are many cases in which shareholders don’t receive any value, such as a bankruptcy situation when a company is forced into liquidation.

RELATED TERMS
  1. Shareholders' Equity

    A firm's total assets minus its total liabilities. Equivalently, ...
  2. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  3. Shareholder Value

    The value delivered to shareholders because of management's ability ...
  4. Shareholders' Agreement

    An arrangement among a company's shareholders describing how ...
  5. Shareholder Value Transfer - SVT

    A metric intended to guide shareholders in how much equity compensation ...
  6. Residual Dividend

    The term residual dividend refers to a method of calculating ...
Related Articles
  1. Investing

    What is the Shareholder Equity Ratio?

    The shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets.
  2. Investing

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  3. Investing

    Who is a Shareholder?

    A shareholder is a person, company or other entity that owns at least one share of a company’s stock.
  4. Investing

    5 Tips For Reading A Balance Sheet

    If you know how to read it, the balance sheet provides valuable information on a potential investment.
  5. Investing

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  6. Investing

    What Does Negative Shareholder Equity On A Balance Sheet Mean?

    Negative shareholder equity on a company’s balance sheet is a red flag that should prompt potential investors to take a closer look before committing their money.
  7. Markets

    Which Is Best: Cash Dividend Or Stock Dividend?

    Cash dividends are paid to shareholders when a company decides not to use the money for operations, but instead, transfer economic value to its shareholders.
  8. Markets

    Knowing Your Rights As A Shareholder

    Common shareholders typically enjoy six main rights.
  9. Investing

    How Dividends Affect Stockholders' Equity

    Find out how dividends affect a company's stockholders' equity and how the accounting process changes based on the type of dividend issued.
  10. Investing

    Balance Sheet: Analyzing Owners' Equity

    Analyzing owners’ equity is an important analytics tool, but it should be done in the context of other tools such as analyzing the assets and liabilities on the balance sheet.
RELATED FAQS
  1. How do you calculate shareholder equity?

    Find out more about shareholders' equity, what shareholders' equity measures and how to calculate a company's shareholders' ... Read Answer >>
  2. What are the components of shareholders' equity?

    Understanding company valuation figures, such as shareholders' equity, can be a powerful tool in assessing the financial ... Read Answer >>
  3. What is the difference between a company's equity and its shareholders' equity?

    Understand the difference and the interrelationship between shareholders' equity in a company and the company's actual total ... Read Answer >>
  4. What happens to the stock of a public company that goes bankrupt?

    Occasionally, publicly listed companies go bankrupt. The company's shareholders, depending on the type of stock they hold, ... Read Answer >>
  5. What does negative shareholder equity on a balance sheet mean?

    Negative shareholder equity could show up on a company's balance sheet for a number of reasons, all of which should serve ... Read Answer >>
  6. What does it signify about the state of a company if it has unusually high shareholders' ...

    Understand the meaning and calculation of shareholder equity and what a high level of shareholder equity signifies about ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center