Word of the Week 'Equity'


What Is Equity?

Equity is typically referred to as shareholder equity (also known as shareholders' equity) which represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company's debt was paid off.

Equity is found on a company's balance sheet and is one of the most common financial metrics employed by analysts to assess the financial health of a company. Shareholder equity can also represent the book value of a company.

There are various types of equity that extend beyond a corporation’s balance sheet. In this article, we’ll explore the different types of equity including how investors can calculate a corporation’s equity or net worth.

Equity
KEY TAKEAWAYS
  • There are various types of equity, but equity typically refers to shareholder equity, which represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company's debt was paid off.

  • We can think of equity as a degree of ownership in any asset after subtracting all debts associated with that asset.

  • Equity represents the shareholders’ stake in the company. The calculation of equity is a company's total assets minus its total liabilities.

The Formula for Shareholder Equity Is

Shareholders'~equity = Total~Assets - Total~Liabilities Shareholders′ equity=Total Assets−Total Liabilities

How to Calculate Shareholder Equity

The balance sheet holds the basis of the accounting equation, which is as follows:

Assets = liabilities + shareholder~equity Assets=liabilities+shareholder equity

However, we want to find the value of equity, which can be done as follows:

  1. Locate the company's total assets on the balance sheet for the period.

  2. Locate total liabilities, which should be listed separately on the balance sheet.

  3. Subtract total