how stockholders equity works
stockholders equity is often referred to as the book value of the company and it comes from two primary sources in most cases retained earnings are the largest component of stockholders equity this is especially true when dealing with companies that have been in business for many years 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 for this reason many 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 if used in conjunction with other tools and metrics the investor can accurately analyze the health of an organization stockholders equity is also referred to as shareholders or owners equity stockholders equity and retained earnings re retained earnings are a company s net income from operations and other business activities retained by the company as additional equity capital retained earnings are thus a part of stockholders equity they represent returns on total stockholders equity reinvested back into the company these earnings reported as part of the income statement accumulate and grow larger over time at some point accumulated retained earnings may exceed the amount of contributed equity capital and can eventually grow to be the main source of stockholders equity stockholders equity and paid in capitalcompanies fund their capital purchases with equity and borrowed capital the equity capital stockholders equity can also be viewed as a company s net assets you can calculate this by subtracting the total assets from the total liabilities investors contribute their share of paid in capital as stockholders which is the basic source of total stockholders equity the amount of paid in capital from an investor is a factor in determining his her ownership percentage stockholders equity and the impact of treasury sharescompanies may return a portion of stockholders equity back to stockholders when unable to adequately allocate equity capital in ways that produce desired profits this reverse capital exchange between a company and its stockholders is known as share buybacks shares bought back by companies become treasury shares and their dollar value is noted in the treasury stock contra account treasury shares continue to count as issued shares but they are not considered to be outstanding and are thus not included in dividends or the calculation of earnings per share eps treasury shares can always be reissued back to stockholders for purchase when companies need to raise more capital if a company doesn t wish to hang on to the shares for future financing it can choose to retire the shares equity is the corporation s owners residual claim on assets after debts have been paid example of stockholders equitybelow is the balance sheet for apple aapl as of july 1 2023 for that period stockholders equity was therefore 60 2 billion 335 274 8 looking at the same period one year earlier we can see that the year over year yoy change in equity was an increase of 9 5 billion the balance sheet shows this increase is due to a decrease in liabilities larger than the decrease in assets the value of 60 2 billion in shareholders equity represents the amount left for stockholders if apple liquidated all of its assets and paid off all of its liabilities an alternative calculation of company equity is the value of share capital and retained earnings less the value of treasury shares stockholders equity is an effective metric for determining the net worth of a company but it should be used in tandem with the analysis of all financial statements including the balance sheet income statement and cash flow statement 