Shareholder Equity (SE)
What Is Shareholders' Equity?
Shareholders' equity represents the net value of a company. As an accounting measure, shareholders' equity (likewise alluded to as stockholders' equity) is the difference between a company's assets and liabilities. It is likewise called book value of equity.
Shareholders' equity is found at the lower part of a company's balance sheet, after assets and liabilities. What's more, as the balance sheet's name suggests, assets must approach the sum of liabilities and shareholders' equity. For publicly traded companies, the balance sheet is found in the financial statement documented quarterly and every year with the Securities and Exchange Commission.
A few investors, however, don't see the book value of shareholders' equity as a meaningful measure for assessing the value of a company because it's based on historical data. Some would zero in on alternative valuation measures, for example, market capitalization, which is calculated by multiplying a company's latest stock price by the number of shares outstanding.
Step by step instructions to Calculate Shareholders' Equity
There are two methods for calculating shareholders' equity on the balance sheet.
1. Difference Between Assets and Liabilities
Shareholders' equity can be calculated by subtracting assets from liabilities.
Formula One
Shareholders' Equity = Assets - Liabilities
2. Sum of Its Parts
Shareholders' equity likewise can be calculated by adding the line things that would normally show up on a company's balance sheet: capital stock (common and preferred stock), retained earnings, and other extensive income.
Formula Two
Shareholders' Equity = Capital Stock + Additional Paid-In Capital + Retained Earnings + Other Comprehensive Income
What Items Are Included in Shareholders' Equity?
Below are some line things that would commonly show up under shareholders' equity on the balance sheet.
Capital Stock
Capital stock includes common and preferred stock. Voting rights are given onto common stockholders, while dividends, including special dividends, are paid first to preferred shareholders. Stock that has been repurchased and set as treasury stock are deducted from the number of shares outstanding. Shares are based on par value, which is the value set by a company's charter and will generally be well below market value.
Extra Paid-In Capital
Extra paid-in capital is the value of shares better than average value. Models include the issuance of new shares, which would support paid-in capital, and stock repurchases, which would reduce paid-in capital.
Retained Earnings
Accumulated earnings from current and past reporting periods are represented in shareholders' equity.
Other Comprehensive Income
Revenues, expenses, gains, and losses that are not yet realized make up other thorough income.
Shareholders' Equity Example: Apple (NASDAQ: AAPL)
Below is Apple's shareholders' equity on its balance sheet, broken down into its parts. Shareholders' equity declined in 2021 from the year before. The company reported in notes on its 2021 financial statement that it went through a large stock repurchase program and had issued common shares. The share buybacks brought about reducing retained earnings.
| Apple | 2021 | % Change | 2020 |
|---|---|---|---|
| Shareholders’ equity: | |||
| Common stock and additional paid-in capital, $0.00001 par value: 50,400,000 shares authorized; 16,426,786 and 16,976,763 shares issued and outstanding, respectively | 57,365 | 13 | 50,779 |
| Retained earnings | 5,562 | -63 | 14,966 |
| Accumulated other comprehensive income/(loss) | 163 | N/A | -406 |
| Total shareholders’ equity | 63,090 | -3.4 | 65,339 |
Features
- Positive shareholder equity means the company has an adequate number of assets to cover its liabilities, yet the company's liabilities surpass its assets assuming it is negative.
- Retained earnings is part of shareholder equity and is the percentage of net earnings not paid to shareholders as dividends.
- You can compute shareholder equity by adding together all assets and all liabilities from a company's balance sheet.
- Shareholder equity is the proprietor's claim in the wake of subtracting total liabilities from total assets.
- Shareholder equity gives analysts and investors a reasonable image of the financial soundness of a company.
FAQ
How Is Shareholder Equity Calculated?
Shareholder equity is the difference between a company's total assets and total liabilities. This equation is known as a balance sheet equation as all the pertinent information can be gathered from the balance sheet. Take the equity at the onset of the accounting period, add or deduct any equity infusions, (for example, adding cash from shares issued or subtracting cash used for treasury purchases), add net income, deduct all cash dividends paid out and any net losses, and what you have left is the shareholder equity for that period.
What Are the Components of Shareholder Equity?
Beside stock (common, preferred, and treasury) parts, the SE statement likewise includes sections that report retained earnings, unrealized gains and losses and contributed (extra paid up) capital. The retained earnings portion mirrors the percentage of net earnings that were not paid to shareholders as dividends and ought not be confused with cash or other liquid assets.
What Can Shareholder Equity Tell You?
Shareholder equity decides the return being produced versus the total amount invested by equity investors. For instance, ratios like return on equity (ROE), which is the consequence of a company's net income partitioned by shareholder equity, are used to measure how well a company's management is using its equity from investors to create profit. Positive shareholder equity means the company has an adequate number of assets to cover its liabilities however assuming it is negative, the company's liabilities surpass its assets. This is cause for concern because it lets you know the value of a business after investors and stockholders are paid out.
