Shareholder equity (SE) is one of several methods investors can use to evaluate a company’s financial stability. Quite simply, SE is equal to a company’s total assets less its total liabilities, and in theory, this value (or lack of) would remain if the company were wound up.
Now clearly the larger the SE figure the better but this is relative depending on how large the company is. It’s a simple calculation that shouldn’t be used in isolation but a positive shareholder equity shows that the company has the assets to cover its liabilities. The formula is as follows.
Shareholder Equity = Total Assets − Total Liabilities
Shareholder equity consists of two primary components: (1) Paid-in capital (money invested by shareholders) and (2) Retained earnings (profits reinvested into the company rather than distributed to shareholders). To find the company’s total assets and liabilities, you will need the balance sheet, which is listed under its respective headings.
To summarise, Shareholder equity can be either negative or positive. If negative, the company could be considered a higher-risk investment. This formula should be used to see trends over time and in conjunction with other formulas, such as Return on Equity (ROE).