A:

Shareholders' equity is a part of the calculation of a company's net equity, but the terms are not synonymous.

Shareholders' equity is the amount of public financing a company has obtained through the sale of shares of both common and preferred stock. As it appears on a company's balance sheet, shareholder equity is listed with other liabilities, which are subtracted from the company's total assets to determine the net equity of the company. The net equity of a company is also referred to as retained earnings. A portion of the retained earnings is usually returned to shareholders in the form of dividend payments, which then increases the total shareholders' equity.

Market analysts and investors prefer to see a good, stable balance between the amount of retained earnings that a company pays out to investors in the form of dividends and the amount the company ultimately retains to reinvest to grow its business.

Shareholders' equity is an important figure that analysts use in equity valuation to determine what return is being generated by the company on the total amount invested by equity investors. Both analysts and investors consider the return on equity (ROE) that is calculated by dividing a company's net income for the year by the total shareholders' equity. In the calculation of ROE, preferred shares are not typically included. The ROE metric is used to assess both the profitability and growth rate of a company. As with the balance of retained earnings and dividend payments, analysts prefer to see stable or improving numbers in the ROE calculation over time.

RELATED FAQS
  1. What is the difference between ROCE and ROE?

    Discover how investors and analysts utilize the return on equity and return on capital employed ratios to gauge financial ... Read Answer >>
  2. What is the average return on equity for a company in the retail sector?

    Find out more about return on equity, how to calculate it and the average return on equity for companies in the retail sector. Read Answer >>
  3. What's the difference between retained earnings and revenue?

    See why retained earnings and revenue are both considered important measurements of a company's financial performance, and ... Read Answer >>
  4. How do dividends affect retained earnings?

    Find out how distribution of dividends affects a company's retained earnings, including the difference between cash dividends ... Read Answer >>
Related Articles
  1. Investing

    High Return On Equity Businesses

    Companies with high returns on equity usually see an increasing stock price in the future.
  2. Managing Wealth

    Looking Deeper Into Capital Allocation

    Discover how companies decide how to spend their cash in a variety of market conditions.
  3. Investing

    Decoding DuPont Analysis

    Get a deeper understanding of ROE with these three-step and five-step calculations.
  4. Investing

    Earnings Power Drives Stocks

    Internal return on investment helps determine a stock's ability to propel shareholder returns.
  5. Investing

    Analyzing Amazon's Return on Equity (ROE) (AMZN)

    Learn how to analyze Amazon's return on equity (ROE), especially given the company's focus on capital investments, as opposed to short-term earnings.
  6. Investing

    Analyzing Wells Fargo's Return on Equity (WFC)

    Examine Wells Fargo & Company's return on equity and how stacks up against its major competitors, along with future projections for the company's ROE.
  7. Investing

    Analyzing Facebook's Return on Equity (FB)

    Learn about Facebook's return on equity (ROE), and find out how it compares to its peers. Discover how net margin, asset turnover and financial leverage impacted its ROE.
  8. 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.
  9. Small Business

    The financial characteristics of a successful company

    There are many factors that contribute to a profitable business. Find out some of the financial characteristics that create a competitive advantage.
RELATED TERMS
  1. Shareholders' Equity (SE)

    Shareholder's equity (SE) is the owner's claim after subtracting ...
  2. Retained Earnings

    Retained earnings are the cumulative net earnings or profit of ...
  3. Balance Sheet

    A balance sheet reports a company's assets, liabilities and shareholders' ...
  4. Capital Dividend

    A capital dividend is a type of payment a firm makes to its investors ...
  5. Equity Fund

    An equity fund is a type of fund that uses investors' capital ...
  6. DuPont Analysis

    DuPont analysis is a fundamental performance measurement framework ...
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center