Shareholder equity displays the net worth of a corporation. Shareholders equity also identifies the amount of money the company has received from the sale of its stock. Shareholder equity could be a combination of common and preferred stock, if both types were sold. Legally, shareholder equity equals the claim of all stockholders on the assets of the corporation. Other names for shareholder equity are stockholder's equity, net worth, or share capital.
Shareholder equity represents the current value of all common and preferred stock held by investors.
What Is Shareholders Equity?
When you have equity in a house, that's the amount you've put into it that you'll likely get back if you sell the home. Generally speaking, equity meaning is the amount of value remaining on an asset once all of the debts and other liabilities are taken out of consideration.
That equity meaning can also apply to stocks. In business, equity refers to the value of a business minus all its liabilities. The shareholders fund part of that is based on the total equity that would apply if, for some reason, the business folded and its assets had to be liquidated.
Using an Accounting Equation
Calculating shareholders fund equity for accounting, finance and investment purposes is simple. Add total corporate assets and subtract total liabilities. For example, a company with $200,000 in assets and $175,000 in liabilities has $25,000 in shareholder equity.
It doesn't matter how many shares are outstanding. There could be 1,000 shares or 100,000 shares owned by investors. The shareholder equity in this example is $25,000 regardless of the number of shares issued or the number of stockholders.
Where Does It Come From?
There are two typical components of shareholder equity. One is cash from investors who buy stock in the corporation. The amount of investment dollars is called share capital. The second component is called retained earnings.
These are accumulated company profits since the business started. The net retained earnings equals all profits minus corporation dividends paid to shareholders. The combination of share capital and retained earnings equals shareholder equity.
Stockholders' Claim on Assets
Although at first potentially confusing, this legal concept is easy to understand. If you own stock in a company that is liquidated, shareholder equity is what's left for stockholders after all business creditors and debts are paid. For example, a corporation with $200,000 in assets and $175,000 in liabilities would, on paper, have $25,000 cash to give to stockholders after all assets were sold and all debts paid in full.
Negative Shareholder Equity
In some instances, you'll see shareholder equity listed as "negative shareholder equity" on a business's balance sheet. Negative equity meaning has to do with the balance that would be left for shareholders after all the liabilities are subtracted.
When a business has more liabilities than it's worth, that means the shareholders fund would be nonexistent if something happened to the business. If everything was liquidated in a negative equity situation, it would mean that the shareholders would walk away with nothing.
Current and Future Stock Price
Shareholder equity may influence a company's stock price, but it indicates value more than the cost to buy shares. For example, a company with high shareholder equity may also have a strong current stock price, but the company is losing market share to a competitor, making the future appear bleak.
Conversely, a company with low shareholders equity has recently offered a superior product, cornering their market. This company's stock price may have strong increases in the future, while the former organization's stock price may tumble, generating investor losses.