What’s it: Shareholder equity is money that can be associated with a company’s owner or shareholder. It is a residual claim on company assets after deducting liabilities. Although there are several accounts in it, the two most significant are paid-in capital and retained earnings.
Other terms of shareholder equity are the owner’s equity, net assets, or the company’s net worth.
Investors view companies with negative equity as risky investments. This shows the liability of the company exceeds its assets and can be considered as a bankruptcy balance.
Formula and components of shareholder equity
Shareholder equity is the difference between the company’s total assets and total liabilities. Mathematically, we can formulate it as:
Shareholder equity = Total assets – Total liabilities
Items in this section are paid-up capital, additional paid-in capital, retained earnings, other comprehensive income, treasury shares, and minority interests (or non-controlling interests).
Paid-in capital is the amount paid by the shareholders when the shares were first offered to the public. It is the money a company makes when selling its shares. Then, the company categorizes the difference between the selling value of shares (at market prices) and the nominal value of shares to the additional paid-in capital account.
Retained earnings are the accumulated company’s net profit that is not distributed to shareholders as dividends. Because this is a cumulative number, retained earnings can be negative if the company has lost money from time to time (called accumulated deficits).
Treasury stock shares that have been repurchased by the company. Buying back shares result in a reduction in the owner’s equity and the number of shares outstanding. These shares do not receive dividends and do not have voting rights.
Accumulated other comprehensive income is the cumulative other comprehensive income. It comes from transactions that affect the value of a company’s equity but are not directly related to shareholders.
Minority interest, or the non-controlling interests, represents a proportionate share of minority shareholders of the subsidiary’s net assets not wholly owned by the company.