What is Shareholders' Equity (SE)
Shareholders' equity (SE), also referred to as the owner's residual claim after debts have been paid, is equal to a firm's total assets minus its total liabilities. Found on a company's balance sheet, it is one of the most common financial metrics employed by analysts to assess the financial health of a company. Shareholders' equity represents the net or book value of a company.
BREAKING DOWN Shareholders' Equity (SE)
Shareholders' equity, also known as stockholders' equity, can be either negative or positive. If positive, the company has enough assets to cover its liabilities. If negative, the company's liabilities exceed its assets; if prolonged, this is considered balance sheet insolvency. For this reason, many investors view companies with negative shareholders' equity as risky or unsafe investments. Shareholders' equity alone is not a definitive indicator of a company's financial health; used in conjunction with other tools and metrics, the investor can accurately analyze the health of an organization.
Shareholders' Equity Standard Calculation
Most commonly, shareholders' equity is calculated as total assets - total liabilities. All the information needed to compute a company's shareholders' equity is available on its balance sheet. Total assets include current and noncurrent assets. Current assets are assets that can be converted to cash within a year (e.g. cash, accounts receivable, inventory, et al.). 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, the shareholders' equity can be determined. For example, ABC company has total assets of $2.6 million and total liabilities of $920,000.
Therefore, ABC shareholders' equity is $1.68 million.
Shareholder's Equity Alternate Equation
Shareholders' equity can also be expressed as a company's share capital and retained earnings less the value of treasury shares. This method, however, is less common. Though both methods yield the same figure, the use of total assets and total liabilities is more illustrative of a company's financial health. By comparing concrete numbers reflecting everything the company owns and everything it owes, the "assets-minus-liabilities" shareholders' equity equation paints a clear picture of a company's finances that is easily interpreted by investors, professionals, and laypersons.