shareholders' equity

(noun)

The remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.

Related Terms

Examples of shareholders' equity in the following topics:

  • Owners' Equity

    • Shareholders' equity is the difference between total assets and total liabilities.
    • If liability exceeds assets, negative equity exists.
    • In an accounting context, shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.
    • Ownership equity is also known as risk capital or liable capital.
    • Accounts listed under ownership equity include (for example):

  • Sample Evaluation

    • ROE (Return on Equity) = Net Income / Shareholder Equity = 1,057/7,340 = 14.4 percent
    • The ROE measures the firm's ability to generate profits from every unit of shareholder equity. 0.144 (or 14 percent) is not a bad figure, but by no means a very good once, since ROE's between 15 to 20 percent are generally considered good.
    • This shows the relative proportion of shareholders' equity and debt used to finance a company's assets.

  • Defining the Balance Sheet

    • Assets, liabilities, and ownership equity are listed as of a specific date, such as the end of the company's financial year.
    • A standard company balance sheet has three parts: assets, liabilities, and ownership equity.
    • Another way to look at the same equation is that assets equals liabilities plus owner's equity.
    • Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity).
    • This balance sheet shows the company's assets, liabilities, and shareholder equity.

  • Profitability Ratios

    • Return on Equity: The return on equity (ROE) measures profitability related to ownership.
    • It measures a firm's efficiency at generating profits from every unit of the shareholders' equity.
    • The ROE is equal to the net income divided by the shareholder equity.

  • Debt Utilization Ratios

    • The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.
    • D/E = Debt(liabilities)/Equity.

  • Equity Finance

    • Companies can use equity financing to raise money and/or increase shareholder liquidity (through an IPO).
    • A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares.
    • Financing a company through the sale of stock in a company is known as equity financing.
    • In finance, the cost of equity is the return, often expressed as a rate of return, a firm theoretically pays to its equity investors, (i.e., shareholders) to compensate for the risk they undertake by investing their capital.
    • Firms obtain capital from two kinds of sources: lenders and equity investors.

  • Financial Accounting

    • A balance sheet demonstrates the overall value of organizational assets by listing current and long-term assets (fixed or otherwise) alongside short term and long term liabilities and stakeholder equity.
    • Through balancing the assets against the combination of liabilities and stakeholder equity, the financial accounting should encounter a zero sum game.
    • Simply put: Assets = Liabilities + Shareholder Equity.

  • Alternate Sources of Funds

    • Receipts for the sale of loans, debt, or equity instruments in a trading portfolio
    • Financing activities include the inflow of cash from investors, such as banks and shareholders.
    • Other activities which impact long-term liabilities and equity of the company are also listed under financing activities, such as:

  • The Importance of Finance

    • The primary goal of corporate finance is to maximize shareholder value.
    • Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders.

  • S-Corporations (S-Corps)

    • To avoid this "phantom income" scenario, S corporations commonly use shareholder agreements that stipulate at least enough distribution must be made for shareholders to pay the taxes on their distributive shares.
    • Thus, income is taxed at the shareholder level and not at the corporate level, and payments are distributed to S shareholders tax-free to the extent that the distributed earnings were not previously taxed.
    • Spouses are automatically treated as a single shareholder.
    • Shareholders must be U.S. citizens or residents and natural persons, so corporate shareholders and partnerships are generally excluded.
    • Profits and losses must be allocated to shareholders proportionately to each one's interest in the business.