how shareholder equity works
by comparing concrete numbers reflecting everything the company owns and everything it owes the assets minus liabilities shareholder equity equation paints a clear picture of a company s finances easily interpreted by investors and analysts 1 equity is used as capital raised by a company which is then used to purchase assets invest in projects and fund operations a firm typically can raise capital by issuing debt in the form of a loan or via bonds or equity by selling stock investors usually seek out equity investments as it provides a greater opportunity to share in the profits and growth of a firm equity is important because it represents the value of an investor s stake in a company represented by the proportion of its shares owning stock in a company gives shareholders the potential for capital gains and dividends owning equity will also give shareholders the right to vote on corporate actions and elections for the board of directors these equity ownership benefits promote shareholders ongoing interest in the company shareholder equity can be either negative or positive if positive the company has enough assets to cover its liabilities if negative the company s liabilities exceed its assets if prolonged this is considered balance sheet insolvency typically investors view companies with negative shareholder equity as risky or unsafe investments shareholder equity alone is not a definitive indicator of a company s financial health used in conjunction with other tools and metrics the investor can accurately analyze the health of an organization formula and how to calculate shareholders equitythe following formula and calculation can be used to determine the equity of a firm which is derived from the accounting equation shareholders equity total assets total liabilities text shareholders equity text total assets text total liabilities shareholders equity total assets total liabilitiesthis information can be found on the balance sheet where these four steps should be followed 1shareholder equity can also be expressed as a company s share capital and retained earnings less the value of treasury shares this method however is less common though both methods yield the exact figure the use of total assets and total liabilities is more illustrative of a company s financial health 