Shareholder equity is listed on the balance sheet is a common financial metrics employed by analysts to determine the financial health of a company. Shareholders' equity represents the net value of a company, or the amount that would be returned to shareholders if all the company's assets were liquidated and all its debts repaid. In short, shareholders' equity measures the company's net worth.
How to Calculate Shareholder Equity
A company's shareholder equity is calculated by subtracting total liabilities from its total assets, which are listed on a company's balance sheet. The formula for calculating shareholder equity is below:
Shareholder equity represents the amount of financing the company experiences through common and preferred shares. Shareholder equity could also be calculated by subtracting the value of treasury shares from a company's share capital and retained earnings.
Example of Shareholder Equity
Below is the balance sheet for Bank of America Corporation (BAC) as of the end of 2017, from their annual 10K statement.
As of December 31, 2017, Bank of America had total assets of $2,281,234 trillion and total liabilities of $2,014,088 trillion.
Bank of America's total shareholder equity:
- $2,281,234 (assets) - $2,014,088 (liabilities) = $267,146 billion.
- We can also see the line item on the balance sheet (in green) for shareholder equity. The number is also broken out by each component including preferred stock, common stock, retained earnings, and accumulated other comprehensive income (or loss) that net to the shareholder equity total.
- Shareholder equity can also be calculated as: $22,323 + 138,089 + 113,816 - 7,082 = $267,146 billion.
The value of $267,146 billion in shareholder equity represents the amount left for shareholders if Bank of America paid off all of its liabilities.
Shareholder equity is an effective metric, but any analysis should be done in tandem with analyzing the balance sheet, income statement, and cash flow statement for a comprehensive fundamental analysis of a company.