What is Shareholder’s Equity

1. What is Shareholder’s Equity? How to Calculate It? To operate successfully, every company must have some assets and in the course of business, liabilities are also accumulated. Assets, liabilities and shareholder’s equity make up for most of the financial statements of a company. These contributing factors represent the health of a company’s financial position. Assets and liabilities are common knowledge, but what is a shareholder’s equity, what it means for an equity investor and more importantly, how does one go about calculating it? Reading this piece would give you all the answers. What is Shareholder’s Equity? If it comes to a point where all the assets of a particular company are liquidated and debts are paid off, the amount of money that gets back to the shareholder or the equity investor is its net equity. In other terms, it is the net worth of the said company, after the settlement of its liabilities and assets. This figure is one of the prime indicators of how the company is performing financially. Hence, it is considered vitally important by investors with a vested interest in the company. Also, the number of earnings a company retains, although considered in the category of shareholder’s equity, is not usually sent to the investors, through what is commonly referred to as dividend. Instead, these gains are put back into the company’s finances to advance its growth. This means that the value of liquidation of a company can not be considered the same as that of shareholders. It is primarily because, in the case of liquidation, the assets that this company holds gets automatically reduced, due to inflation and other similar factors. This is what primarily influences the decision of an equity investment by interested parties. How to Calculate Shareholder’s Equity? Although many approaches can be taken towards the calculation of a shareholder’s equity, its direct implications lie in the company’s worth left after the clearance of its outstandings. One can find this information in the company balance sheets easily. Thus, a simple formula to calculate shareholder’s equity is the following. This method is also utilized by stock fund companies to gather intel. Shareholder’s Equity (SE) = Total Assets - Total Liabilities For calculation purposes, both long term and current assets and liabilities have to be considered. Inventory, accounts or other assets that can easily be modified to cash within the time of a year can be called current assets. Long term assets, on the other hand, are assets like machinery, real estate and similar things, that can not be exchanged for cash within a year.

2. Similarly, the term ‘total liabilities’ consists of the current and long term liabilities of the company. Long term liabilities differ from the current ones in their tenure of repayment. Taxes or accounts that need to be cleared within 12 months are considered current, while leases, bonds and other legal tenures to be paid-off post a year can be considered long term liabilities. In some cases, another method of calculation that can be used by a company or stock fund is the following.