Home Investing Dictionary Investment Formula Shareholders' Equity
Shareholders' Equity
Written by Kenny Foo   
Friday, 06 March 2009 15:42

Investment Formula Description

Shareholders' equity, as its name, is the net worth for the company after subtracting total liabilities from total assets.

For stock, it is sometime referred as net assets, ownership's equity or even net worth of the company. Shareholders' equity represents the shareholders' claim to a business assets after all creditors and debts had been cleared. Shareholders' equity normally consists of two components. The first is the original share capital invested in the company or the cash paid by the investors when the company issue stock, while the second is the retained earnings or retained profit that are accumulated by the company. Those accumulated profit was not paid out to its investors and was held by the company for future business expansion. Investors can find shareholder's equity or net worth from balance sheet. Moreover, investors can use shareholders' equity and net income ( NI ) to find out return on equity  ( ROE ) for one investment.

Investment Formula

Shareholders' Equity = Total Assets - Total Liabilities

Shareholders' Equity = Share Capital + Retained Profits - Treasury Shares

Investment Formula Example

Corporation A has $70,000 total assets and $ 20,000 total liabilities.  The shareholders' equity calculation is as following.

Shareholders' Equity = Total Assets - Total Liabilities = 70,000 - 20,000 = $50,000

The net worth or shareholders' equity for corporation A is $50,000.

Corporation A has $30,000 share capital when it originally issue share to investors. After few years of operation, corporation A has retained profit up to $ 40,000 and it has buy back $ 20,000 of its company share to keep in treasury shares. The shareholders' equity for corporation A as following. 

Shareholders' Equity = Share Capital + Retained Profits - Treasury Shares = 30,000 + 40,000 - 20,000 = $50,000

Although using different investment formula to calculate, but the outcome is the same to obtain the net worth for corporation A. Corporation A net worth or shareholders' equity is $50,000.

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Last Updated ( Monday, 09 March 2009 10:56 )
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