{"id":3206,"date":"2021-07-14T13:04:59","date_gmt":"2021-07-14T07:34:59","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=3206"},"modified":"2021-08-31T10:40:14","modified_gmt":"2021-08-31T05:10:14","slug":"what-is-shareholders-equity-overview-components-and-how-to-calculate","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/","title":{"rendered":"What Is Shareholders&#8217; Equity &#8211; Overview, Components and How To Calculate"},"content":{"rendered":"\n<p>Many companies raise capital by issuing shares to investors. When investors <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a> in the shares issued by the company, they not only contribute to the company\u2019s <a href=\"https:\/\/www.tickertape.in\/blog\/share-capital\/\">share capital<\/a>, they also own a stake in the company. The share capital gives the company a permanent source of funding. It is paid back to the <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/\">equity<\/a> <a href=\"https:\/\/www.tickertape.in\/blog\/shareholders\/\">shareholders<\/a> at the time of the company\u2019s liquidation. <\/p>\n\n\n\n<p>In the meanwhile, shareholders can assess the sufficiency of the company\u2019s assets by checking the shareholders\u2019 equity. Shareholder equity is an important financial yardstick to measure the company\u2019s financial performance. Let\u2019s understand what it is all about.<\/p>\n\n\n\n<p><strong>This article covers:<\/strong><\/p>\n\n\n\n<ul><li><a href=\"#equity\">What is shareholders\u2019 equity?<\/a><\/li><li><a href=\"#components\">Components of shareholders\u2019 equity<\/a><\/li><li><a href=\"#calculation\">Calculation of shareholders\u2019 equity<\/a><\/li><li><a href=\"#what\">What does shareholders\u2019 equity denote?<\/a><\/li><\/ul>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/#What-is-shareholders-equity\" title=\"What is shareholders\u2019 equity?\">What is shareholders\u2019 equity?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/#Components-of-shareholders-equity\" title=\"Components of shareholders\u2019 equity\">Components of shareholders\u2019 equity<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/#The-share-capital\" title=\"The share capital\">The share capital<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/#Retained-earnings\" title=\"Retained earnings\">Retained earnings<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/#Treasury-stock\" title=\"Treasury stock\">Treasury stock<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/#Calculation-of-shareholders-equity\" title=\"Calculation of shareholders\u2019 equity\">Calculation of shareholders\u2019 equity<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/#Formula-1\" title=\"Formula #1\">Formula #1<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/#Formula-2\" title=\"Formula #2\">Formula #2<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/#What-does-shareholders-equity-denote\" title=\"What does shareholders\u2019 equity denote?\">What does shareholders\u2019 equity denote?<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"equity\"><span class=\"ez-toc-section\" id=\"What-is-shareholders-equity\"><\/span><strong>What is shareholders\u2019 equity?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Shareholders\u2019 equity is the amount that shows a company\u2019s residual assets to pay back its shareholders. Also known as stockholders\u2019 equity, it is the fund left for the shareholders after the company pays back all of its debts.&nbsp;<\/p>\n\n\n\n<p>If you look at it from a mathematical point of view, shareholders\u2019 equity can be denoted as the company\u2019s total assets minus the total liabilities. In other words, it is the assets that remain to pay back the company\u2019s equity shareholders when all the debts have been paid off at the time of liquidation.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"components\"><span class=\"ez-toc-section\" id=\"Components-of-shareholders-equity\"><\/span><strong>Components of shareholders\u2019 equity<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>To calculate shareholders\u2019 equity or shareholders fund, you need to know the main components that constitute it. These main components include the following:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The-share-capital\"><\/span><strong>The share capital<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>When we talk about the share capital, we have to consider both its&nbsp; components:<\/p>\n\n\n\n<p><strong>1. The outstanding share capital<\/strong>: This amount denotes the capital raised by issuing shares to the public. So, if the company issues 1 lakh shares to the public and each share is valued at Rs 10, the outstanding share capital would be: 1 lakh x Rs 10 = Rs 10 lakh. When calculating the outstanding share capital, you need to consider the share\u2019s book value or par value, not the <a href=\"https:\/\/www.tickertape.in\/blog\/market-value\/\">market value<\/a>. Moreover, you should calculate the outstanding share capital for both <a href=\"https:\/\/www.tickertape.in\/blog\/difference-between-equity-share-and-preference-share-all-you-need-to-know\/?ref=blog\">equity shares and preference shares<\/a>. For example, consider the following share capital of a company:<\/p>\n\n\n\n<figure class=\"wp-block-table aligncenter is-style-regular\"><table><tbody><tr><td><strong>Type of shares<\/strong><\/td><td><strong>Par or book value<\/strong><\/td><td><strong>Current market value<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/www.tickertape.in\/blog\/what-are-equity-shares-meaning-types-features-limitations-and-more\/\">Equity shares<\/a> (1 lakh shares)<\/td><td>Rs 10<\/td><td>Rs 15<\/td><\/tr><tr><td><a href=\"https:\/\/www.tickertape.in\/blog\/preference-share\/\">Preference shares<\/a> (50,000 shares)<\/td><td>Rs 15<\/td><td>Rs 20<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>The outstanding share capital would be calculated as follows:<br>Outstanding <a href=\"https:\/\/www.tickertape.in\/blog\/what-are-equity-shares-meaning-types-features-limitations-and-more\/?ref=blog\">equity share<\/a> capital = Rs 10 x 1 lakh = Rs 10 lakh<br>Outstanding preference share capital = Rs 15 x 50,000 = Rs 7.5 lakh<br>Total outstanding share capital = Rs 17.50 lakh<\/p>\n\n\n\n<p><strong>2. Additional paid-in capital<\/strong>: If the company\u2019s shares were issued at a premium, the difference between the book value and the cost at which the shares were subscribed is called the additional paid-in capital.&nbsp;For example, say a company is issuing 1 lakh shares with a book value of Rs 100 each at Rs 120. So, each share is being issued at a premium of Rs 20. In this case, the additional paid-in capital would be Rs 20 x 1 lakh = Rs 20 lakh.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Retained-earnings\"><\/span><strong>Retained earnings<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>When the company earns a profit, it retains a part of the profit within the business for growth and expansion. The remaining amount of profit is, then, distributed among shareholders. This retained profit is also called retained earnings.&nbsp;<\/p>\n\n\n\n<p>For example, if a company earns a profit of Rs 1 cr in a year and distributes Rs 40 lakh in dividends, it retains a profit of Rs 60 lakh which is called the retained earnings. Retained earnings are added to the share capital in the calculation of shareholders\u2019 equity because they form a part of the shareholders\u2019 fund.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Treasury-stock\"><\/span><strong>Treasury stock<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Companies often buy back some of their outstanding shares from their shareholders. The shares bought back are called treasury stock. They reduce the shareholders\u2019 equity and are, thus, subtracted from the value of the share capital when calculating shareholders\u2019 equity.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"calculation\"><span class=\"ez-toc-section\" id=\"Calculation-of-shareholders-equity\"><\/span><strong>Calculation of shareholders\u2019 equity<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are two main formulae that you can use to calculate the shareholders\u2019 equity. These formulae are highlighted below:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Formula-1\"><\/span><strong>Formula #1<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>Shareholders\u2019 Equity = Total assets &#8211; Total liabilities<\/strong><br><br>Interpretation: In this formula, all the assets of the balance sheet are summed up and all the liabilities, current and long term, are also summed. The excess of assets over liabilities is the shareholders\u2019 equity.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Formula-2\"><\/span><strong>Formula #2<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>Shareholders\u2019 Equity = Share capital + retained earnings &#8211; treasury stock<\/strong><br><br>Interpretation: In this formula, you use the components of shareholders\u2019 equity to find the value. Take the outstanding share capital of the company, add the retained earnings, and deduct the share buybacks to find out the shareholders\u2019 equity.<\/p>\n\n\n\n<p>Now that you know both the formulae, let\u2019s calculate the shareholders\u2019 equity using them. Here\u2019s a sample balance sheet of a company:<\/p>\n\n\n\n<figure class=\"wp-block-table aligncenter\"><table><tbody><tr><td><strong>Liabilities&nbsp;<\/strong><\/td><td><strong>Amount (Rs)<\/strong><\/td><td><strong>Assets&nbsp;<\/strong><\/td><td><strong>Amount (Rs)<\/strong><\/td><\/tr><tr><td>Share capital<\/td><td>50,00,000<\/td><td>Land and building<\/td><td>35,00,000<\/td><\/tr><tr><td>Retained earnings<\/td><td>10,00,000<\/td><td>Plant and machinery<\/td><td>25,00,000<\/td><\/tr><tr><td>Long term debt<\/td><td>20,00,000<\/td><td>Stock<\/td><td>15,00,000<\/td><\/tr><tr><td>Outstanding payments<\/td><td>4,00,000<\/td><td>Debtors&nbsp;<\/td><td>10,00,000<\/td><\/tr><tr><td>Creditors&nbsp;<\/td><td>2,50,000<\/td><td>Cash&nbsp;<\/td><td>1,50,000<\/td><\/tr><tr><td><strong>Total&nbsp;<\/strong><\/td><td><strong>86,50,000<\/strong><\/td><td><strong>Total<\/strong><\/td><td><strong>86,50,000<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>Calculation of shareholders\u2019 equity&nbsp;<\/p>\n\n\n\n<ul><li><strong>Formula #1:<\/strong> total assets &#8211; total liabilities = Rs 86,50,000 &#8211; Rs 26,50,000 =&nbsp; Rs 60,00,000<\/li><li><strong>Formula #2:<\/strong> share capital + retained earnings &#8211; treasury stock&nbsp;= Rs 50,00,000 + Rs 10,00 000 &#8211; 0 = Rs 60,00,000<\/li><\/ul>\n\n\n\n<p>So, whichever formulae you use, the result would be the same!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what\"><span class=\"ez-toc-section\" id=\"What-does-shareholders-equity-denote\"><\/span><strong>What does shareholders\u2019 equity denote?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>If the assets of the company exceed its liabilities, the shareholders\u2019 equity would be a positive figure. This would depict that the company has excess assets that can be used to pay back the shareholders. On the other hand, if the shareholders\u2019 equity is a negative figure, it means that the company\u2019s liabilities exceed its assets, a scenario that is not favourable. If the shareholders\u2019 equity remains negative for consecutive years, the company faces a danger of liquidation. Thus, for prospective and existing investors, this is a red flag.<\/p>\n\n\n\n<p>When you invest in a company, an assessment of its shareholders\u2019 equity would give you an idea of whether the company has strong financials or not. Thus, shareholders\u2019 equity can help investors make the right investment decisions. Moreover, for computing the return on equity, shareholders\u2019 equity is an important component. It, therefore, helps investors assess how effective the company is in using its share capital to generate returns.&nbsp;<\/p>\n\n\n\n<p>The shareholders\u2019 equity is, therefore, an important component of a company\u2019s balance sheet which is used by investors, along with other financial details to make investment decisions. You can also check out a company\u2019s shareholders\u2019 equity either when you are investing or if you are an existing investor to get an idea about the company\u2019s financial future. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Shareholders&#8217; equity is the amount of assets remaining after the deduction of debt and other liabilities. Know more about shareholders equity, components and how to calculate.<\/p>\n","protected":false},"author":27,"featured_media":3210,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[9],"tags":[386],"acf":[],"modified_by":"Aradhana Gotur","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/07\/Informative-2-3.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3206"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/27"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=3206"}],"version-history":[{"count":7,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3206\/revisions"}],"predecessor-version":[{"id":4245,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3206\/revisions\/4245"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/3210"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=3206"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=3206"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=3206"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}