What Is Stockholders' Equity?

Stockholders' equity, also known as shareholder equity, is the total amount of assets that a company would retain if it paid all of its debts.

That is, it indicates how much money would be available to the company's shareholders if it goes bankrupt and is forced to pay all of its liabilities.

Stockholders' equity is a measurement of the general financial health of the company. If the number for stockholders' equity is negative, it may warn of impending bankruptcy (particularly if it is due to a high debt load).

How Stockholders' Equity Works

Stockholders' equity is often referred to as the 澳洲幸运5官方开奖结果体彩网:book value of the company. ꧒It comes from two primary sources♔:

1. Money that a company acquires when it sells shares to the public
2. 澳洲幸运5官方开奖结果体彩网:Retained earnings (RE) accumulated by the company over time through its operations

In most cases, retained earnings are the largest component of stockholders' equity. This is especially true of companies that have been in business for many years.

Conceptually, stockholders' equity is useful as a means of judging the amount of money that a business has retained.

Negative or Positive

Shareholder equity can be negative or positive. If positive, the company has enough assets to cover its liabilities. If negative, the company's liabilities exceed its assets. If negative equity is prolonged, the result is balance sheet 澳洲幸运5官方开奖结果体彩网:insolvency. 

Many investors view companies with negativeꦫ shareholder equity as risky or unsafe investments.

Still, shareholder equity alone is not a definitive indicator of a company's well-being. It should be used in conjunction with other tools and metrics to 澳洲幸运5官方开奖结果体彩网:analyzeꦐ a company's🉐 financial health.

Calculate Stockholders' Equity

Shareholder🍎s' equity may be calculated in either of two ways:

1. Total assets minus total liabilities
2. Share capital plus retained earnings minus 澳洲幸运5官方开奖结果体彩网:treasury shares

The Formula

$\text{Stockholder's Equity} = \text{Total Assets} - \text{Total Liabilities}$Stockholder’s Equity=Total Assets−Total Liabilities

A company's 澳洲幸运5官方开奖结果体彩网:balance sheet display its total assets and total liabilities:

• Current Assets are assets that can be converted to cash within a year. They include cash, accounts receivable, and inventory.
• Non-Current Assets are long-term assets that cannot be converted to cash or consumed within a year, such as investments; 澳洲幸运5官方开奖结果体彩网:property, plant, and equipment, and intangibles such as patents.

澳洲幸运5官方开奖结果体彩网:Total liabilities include current and long-term liabilities:

• Current liabilities are debts due to be paid within one year, such as accounts payable and taxes payable. 
• Long-term liabilities are obligations due to be paid over periods longer than one year, such as bonds payable, leases, and pension obligations. 
  

Important

The stockholders' equity formula is also known as the balance sheet equation because assets and liabilities are found on a company's balance sheet.

Stockholders' Equity and Retained Earnings

Retained earnings are the portion of net income that a company holds on to as additional equity capital. Thus they are part of stockholders' equity. They represent returns on total sꦅtockholders' equity that had 𒉰been reinvested in the company.

These earnings, 澳洲幸运5官方开奖结果体彩网:reported on the income statement, accumulate over time. At some point, accumulated retained earnings may exceed th🍃e amount of contributed equity capital and can eventually grow to be the main source of stockholders' equity.

Stockholders' Equity and Paid-In Capital

Companies fund their capital purchases with equity investments and borrowed capital. The equity capital/stockholders' equity can also be viewed as a company's net assets (total assets minus total liabilities). 

Investors contribute their share of 澳洲幸运5官方开奖结果体彩网:paid-in capital when they buy shares of stock offered by aꦬ company to the public (e.g., in an initial public offering). This is tꦇhe basic source of total stockholders' equity.

The amount of paid-in capital from an investor is a factor in determining the individual's ownership percentage.

Stockholders' Equity and the Impact of Treasury Shares

Companies may decide to return a portion of stockholders' equity to their stockholders. This reverse capital exchange between a company and its stockholders is known as 澳洲幸运5官方开奖结果体彩网:share buybacks. Importantly, share buybacks🔯 reduce stockholders' equity.

Shares bought back by companies become 澳洲幸运5官方开奖结果体彩网:treasury shares, and their dollar value is noted in the treasury stock 澳洲幸运5官方开奖结果体彩网:contra account.

Treasury shares continue to count as issued shares but they are not considered to be outstanding shares and are thus not included in dividends or the calculation of 澳洲幸运5官方开奖结果体彩网:earnings per share (EPS).

Treasury shares can be reissued to stockholders for purchase when companies need to raise more capital. If a company doesn't prefer to hang on to the shares for future financing, it can 澳洲幸运5官方开奖结果体彩网:retire the shares.

Fast Fact

Equity is the stockholders' claim on the residual value of a company after debts and other liabilities have been paid.

Example of Stockholders' Equity

Below is the  for Apple (AAPL) as of the end of 2024.

It shows that:

• Total assets were $335.03 billion
• Total liabilities were $274.76 billion 
• Stockholders' equity was therefore $60.27 billion ($335.03 billion - $274.76 billion).

The value of $60.27 billion in stockholders' equity represents the amount of money that would be left for Apple's shareholders if Apple 澳洲幸运5官方开奖结果体彩网:liquidated all of its assets and paid off a🌄ll of its liabilities.

Stockholders' equity is an effective metric for determining the net worth of a company, but it should be used in tandem with the analysis of other financial statements, including the 澳洲幸运5官方开奖结果体彩网:income statement, and 澳洲幸运5官方开奖结果体彩网:cash flow statement.

What Is Included in Stockholders' Equity?

Total equity includes the value of all of the company's short-term and long-term assets minus all of its liabilities. It is the real book value of a company.

Is Stockholders’ Equity Equal to Cash on Hand?

No. Cash and cash equivalents would only represent a small piece of a company's financial wealth. A company may be rich in assets like property, plant, and equipment, and relatively poor in hard cash.

Why Is Stockholders' Equity Important to Investors?

Stockholders' equity is important to investors and other stakeholders because, as a measurement of a company's net value (or net worth), it can provide them with an idea of the financial stability and potential for success of a company.

The Bottom Line

Investors and analysts look to many numbers to evaluate the financial health of a company. One of these is shareholders' equity.

This straightforward figure is the sum of all of its 🐼assets minus all of its liabilities. That is, how much would a company be worth if it wa⛄s forced to immediately pay off all of its debts.