How Do You Calculate a Company's Equity?

How Do You Calculate a Company's Equity?

The equity of a company, or shareholders' equity, is the net difference between a company's total assets and its total liabilities. A company's equity is used in fundamental analysis to determine its net worth.

Shareholders' equity represents the net value of a company, or the amount of money left over for shareholders if all assets were liquidated and all debts repaid. 

Key Takeaways

  • A company's equity represents its owners' (shareholders') residual claim to the company's profits.
  • All the information needed to compute a company's shareholder equity is available on its balance sheet. 
  • It is calculated by subtracting total liabilities from total assets.
  • If equity is positive, the company has enough assets to cover its liabilities.
  • If negative, the company's liabilities exceed its assets. When prolonged, this is considered balance sheet insolvency. 

How to Calculate Shareholders' Equity

The formula for calculating shareholders' equity is:

 Shareholder’s Equity = Total Assets Total Liabilities \begin{aligned} &\text{Shareholder's Equity} = \text{Total Assets} - \text{Total Liabilities} \\ \end{aligned} Shareholder’s Equity=Total AssetsTotal Liabilities

Finding the Relevant Data

All the information required to compute shareholders' equity is available on a company's balance sheet. Total assets include current and non-current assets. Current assets are assets that can be converted to cash within a year (e.g., cash, accounts receivable, inventory). Long-term assets are assets that cannot be converted to cash or consumed within a year (e.g. investments; property, plant, and equipment; and intangibles, such as patents).

Total liabilities consist of current and long-term liabilities. Current liabilities are debts typically due for repayment within one year (e.g. accounts payable and taxes payable). Long-term liabilities are obligations that are due for repayment in periods longer than one year (e.g., bonds payable, leases, and pension obligations). Upon calculating the total assets and liabilities, shareholders' equity can be determined.

If you own shares in a company, you own a piece of its equity value!

Example of Shareholders' Equity 

Below is the balance sheet for Apple Inc. (AAPL) as of September 2020. For that period:

  • Total assets (in green) were $323.888 billion
  • Total liabilities (in red) were $258.549billion 

Shareholders' equity was therefore $65.339 billion ($323.888 - $258.549).

Looking at the same period one year earlier, we can see that the year-on-year change in equity was a decrease of $25.15 billion. The balance sheet shows this decrease is due to both a reduction in assets and an increase in total liabilities.

Apple Balance Sheet
Apple Balance Sheet.

The value of $65.339 billion in shareholders' equity represents the amount left for shareholders if Apple liquidated all of its assets and paid off all of its liabilities.

An alternative calculation of company equity is the value of share capital and retained earnings less the value of treasury shares.

Shareholders' equity is an effective metric for determining the net worth of a company, but it should be used in tandem with analysis of all financial statements, including the balance sheet, income statement, and cash flow statement.

Why Is Shareholders' Equity Important?

Shareholders' equity can be negative or positive. If it reads positive, the company has enough assets to cover its liabilities. If negative, the company's liabilities exceed its assets; if prolonged, it amounts to balance sheet insolvency

As such, many investors view companies with negative shareholders' equity as risky or unsafe. However, shareholders' equity alone is not a definitive indicator of a company's financial health; however, used in conjunction with other tools and metrics, an investor can accurately analyze the health of an organization.

Market analysts and investors prefer a balance between the amount of retained earnings that a company pays out to investors in the form of dividends and the amount retained to reinvest back into the company.

Shareholders' equity is an essential metric to consider when determining the return being generated versus the total amount invested by equity investors. For example, ratios like return on equity (ROE), which is the result of a company's net income divided by shareholders' equity, are used to measure how well a company's management is using its equity from investors to generate profit. 

How to Calculate a Company's Equity FAQS

What Is a Company's Equity?

Equity, also referred to as stockholders' or shareholders' equity, is the corporation's owners' residual claim on assets after debts have been paid.

What Is Equity on a Balance Sheet?

A company's equity position can be found on its balance sheet, where there is an entry line for total equity on the right side of the table.

How Do You Calculate Equity in a Private Company?

Unlike public corporations, private companies do not need to report financials nor disclose financial statements. Nevertheless, the owners and private shareholders in such a company can still compute the firm's equity position using the same formula and method as with a public one.

What Is the Formula to Calculate Equity?

Shareholders' equity is equal to a firm's total assets minus its total liabilities.

What Is Included in Total Equity?

Total equity effectively represents how much a company would have left over in assets if the company went out of business immediately.

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