when determining an asset s equity particularly for larger corporations it is important to note these assets may include both tangible assets like property and intangible assets like the company s reputation and brand identity through years of advertising and the development of a customer base a company s brand can come to have an inherent value some call this value brand equity which measures the value of a brand relative to a generic or store brand version of a product 7
for example many soft drink lovers will reach for a coke before buying a store brand cola because they prefer the taste or are more familiar with the flavor if a 2 liter bottle of store brand cola costs 1 and a 2 liter bottle of coke costs 2 then coca cola has brand equity of 1 there is also such a thing as negative brand equity which is when people will pay more for a generic or store brand product than they will for a particular brand name negative brand equity is rare and can occur because of bad publicity such as a product recall or a disaster equity vs return on equityreturn on equity roe is a measure of financial performance calculated by dividing net income by shareholder equity because shareholder equity is equal to a company s assets minus its debt roe could be considered the return on net assets roe is considered a measure of how effectively management uses a company s assets to create profits equity as we have seen has various meanings but usually represents ownership in an asset or a company such as stockholders owning equity in a company roe is a financial metric that measures how much profit is generated from a company s shareholder equity equity and financial accountingthe fundamental accounting equation is assets equalling the sum of liabilities and equity this equation is the basis for the balance sheet which summarizes a company s financial position at a specific point in time in all of the examples we ve discussed in this article the basis of calculating that equity was rooted in this accounting equation liabilities are obligations that the company owes to external parties such as loans accounts payable and accrued expenses equity represents the residual claim on assets after satisfying liabilities a company can pay for something by either taking out debt i e liabilities or paying for it with money they own i e equity therefore the equation reflects the principle that all of a company s resources assets can be paid in one of those two ways 