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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 companys shareholders if all of the assets were liquidated and all of the companys debt was paid off.

Equity is found on a companys 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 corporations balance sheet. In this article, we will explore the different types of equity including how investors can calculate a corporations equity or net worth.

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 companys shareholders if all of the assets were liquidated and all of the companys 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 companys total assets minus its total liabilities. 

Formula and Calculation for Shareholder Equity

it is important for shareholders to know the financial stability of the companies they invest into. The following formula and calculation can be used to determine the risk involved with investing in a firm.

Shareholders Equity=Total Assets−Total Liabilities

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

Assets= Liabilities+Shareholder Equity

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

  1. Locate the companys 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 assets from total liabilities to arrive at shareholder equity.
  4. Total assets will equal the sum of liabilities and total equity.

What Does Equity Tell You?

The accounting equation for the balance sheet as well as equity has applications beyond companies. We can think of equity as a degree of ownership in any asset after subtracting all debts associated with that asset.

Below are several types of equity:

  • A stock or any other security representing an ownership interest, which might be in a private company in which case its called private equity.
  • On a companys balance sheet, the amount of the funds contributed by the owners or shareholders plus the retained earnings (or losses). One may also call this stockholders equity or shareholders equity.
  • In margin trading, the value of securities in a margin account minus what the account holder borrowed from the brokerage.
  • In real estate, the difference between the propertys current fair market Value the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying any liens. Also referred to as “real property value.”
  • When a business goes bankrupt and has to Liquidate, equity is the amount of money remaining after the business repays its creditors. This is most often called “ownership equity,” also known as risk capital or “liable capital.”