What is shareholders equity?
Shareholder or stockholders equity is one simple calculation to pay attention to. Heres what you need to know about how to calculate stockholders equity. Shareholders equity (SE) is also known as stockholders equity, both with the same meaning. This term refers to the amount of equity a corporations owners have left after liabilities or debts have been paid. Equity simply refers to the difference between a companys total assets and total liabilities. There are several components that go into shareholder equity, including retained earnings. This is the percentage of net earnings left over after dividends have already been paid. Its important to note that retained earnings are separate from liquid assets like cash, but still make up a portion of the total assets for equity purposes. How to calculate stockholders equity  The stockholder or shareholders equity formula is straightforward:  Shareholder Equity = Total Assets  Total Liabilities  Total Assets will include all current and noncurrent assets. Current assets are generally liquid, or those which could be easily converted into cash in the short term, such as accounts receivable and inventory. Long-term assets include intangibles like intellectual property and patents, along with property, plant, and equipment (PPE) and investments. Total Liabilities also include both long and short-term entities. Current liabilities would include debts that must be repaid within the year, such as taxes and accounts payable. Long-term liabilities include debts that can be repaid over time, along with obligations like leases and pension payments. Both total assets and total liabilities will be listed on the balance sheet. The shareholders equity formula is the same as the accounting equation, which forms the foundation of a company balance sheet. It applies here as well. To calculate shareholders equity, use the following steps. Find the total assets for the accounting period on the balance sheet. Add together all liabilities, which should also be listed for the accounting period. Subtract the liabilities from the assets to reveal the total shareholders equity. There is a second way to calculate stockholders equity when the balance sheet is unavailable. This method adds together the total capital paid for shares, plus donated capital and retained earnings. This equation is often called the investors equation:  Shareholders Equity = Share Capital + Retained Earnings  Treasury Shares  Share capital includes all contributions from the companys stockholders to purchase shares in the company. Retained earnings are the accumulated profits, or business earnings minus dividends paid out to shareholders. Treasury shares are those that have been issued by the company but then later repurchased. These must be deducted from stockholders equity, as theyre owned by the company. The SE is an important figure to be aware of, primarily for investment purposes. When shareholders equity is positive, this indicates that the company has sufficient assets to cover all of its liabilities. However, when SE is negative, this indicates that debts outweigh assets. If the shareholders equity remains negative over time, the company could be facing insolvency. Shareholder equity can also indicate how well a company is generating profit, using ratios like the return on equity (ROE). This shows you the businesss net income divided by its shareholder equity, to measure the balance between investor equity and profit. Its used in financial modeling to forecast future balance sheet items based on past performance. Although shareholder equity isnt the only factor to consider when weighing up an investment, if its negative, the companys prospects are far riskier. You can use this figure in conjunction with other metrics of financial health to form your analysis. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.