Investors and corporate accounting professionals analyze shareholders' equity to determine how a company is using and managing initial investments and to determine company valuation. Shareholders' equity is calculated simply as total company assets minus total company liabilities. But there are several components that make up this equity calculation.
The number of outstanding shares a company owns is an integral part of shareholders' equity. It is the amount of company stock that has been sold to investors and not repurchased by the company. This figure includes the par value of common stock, as well as the par value of any preferred shares the company has sold.
Additional Paid-in Capital
Shareholders' equity also includes the amount of money paid for shares of stock above the stated par value, known as additional paid-in capital. This figure is derived from the difference between the par value of common and preferred stock and the price each has sold for, as well as shares that were newly sold.
When a company retains income instead of paying it out as a dividend to stockholders, a positive balance in the company’s retained earnings account is created. This figure is also included in shareholders' equity and is typically the largest line item in this calculation.
The final item included in shareholders' equity is treasury stock, which is the amount of shares that have been repurchased from investors by the company. This figure is subtracted from a company's total equity, as it represents a smaller number of available shares for investors once it is repurchased.
Ultimately, shareholders' equity is used to evaluate the overall worth of a company. But numerous components of the balance sheet calculation are needed to gain deeper insight into a company's financial management.