A company’s balance sheet has three major sections, assets, liabilities and stockholders’ equity. Liability represents the total debt of the company and owner’s capital represents shareholders’ ownership. Liabilities and owner’s capital are the two major sources of financing the assets of a company.
Total assets must equal the total liabilities and stockholders equity in order for the balance sheet to balance. Shareholders equity is also known as owners’ equity, net worth, owner’s capital and simply equity.
How to Calculate stockholders’ equity
Shareholders’ equity is the net value which a company will return to its shareholders or owners if all assets are liquidated and debts are paid. It’s also called book value of a company.
You can use the following formula to calculate shareholder’s equity or net worth or book value of the company.
Net worth or shareholders’ equity = total assets – total liabilities
To calculate, you first need to find out your target company’s total assets and total liabilities. Total assets includes all long-term and current assets such as plant, machinery, property, inventory, cash on hand and receivables owned by the company.
Total liabilities means all types of debts companies owe to outsiders, the formula is long-term liabilities plus current liabilities. Liabilities include bank loans, creditors, salaries outstanding, interest payable and other dues.
After finding total assets and liabilities, you have to use the above formula to get the company’s shareholder’s equity or owner’s capital or book value.
Alternative way to calculate stockholders equity
Alternatively you can also add paid-up share capital of the company to retained earnings to get net worth. This means stockholders equity has the following two components.
- Paid-up capital
- Retained earnings
Paid-up capital means the amount that is contributed by company’s owners to start or expand the business in exchange of shares. This is the money originally and subsequently invested in the company by its owners. It’s also called paid-in capital.
Retained earnings is the accumulated profit plus current year’s profit a business has in its balance sheet. It’s part of shareholders’ funds because they represent return on total stockholders’ equity which is reinvested back into the company instead of distributing to them as dividend.
For a listed company, you can find the stockholders equity figure on the face of its balance sheet. It should have disclosed the financial statements with break up of retained earnings and share capital.
If you want to calculate for any other companies or organization, then use the above formula.
Example: Showing how to calculate shareholders equity
A business has total assets worth Rs. 10,00,000 and total liabilities worth Rs. 4,00,000. It has total share capital of Rs. 3,50,000 and retained earnings of Rs. 2,50,000.
By using above formula you can calculate company’s net worth as follows;
Net worth = Total Assets – Total Liabilities = Rs. 10,00,000 – Rs. 4,00,000 = Rs. 6,00,000
As discussed above, it can also be calculated by adding share capital to retained earnings.
Stockholders’ equity = Share capital plus retained earnings = Rs. 3,50,000 + 2,50,000 = Rs. 6,00,000.