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.

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