How to Calculate Internal Equity

by Sean Mullin

Internal equity, also known as retained earnings, are profits that a company reinvests in its own operations instead of distributing them to shareholders as dividends. The choice to withhold internal equity from shareholders helps investors analyze the directors' decision-making and evaluate the company as a worthy investment opportunity. If withheld equity routinely results in the increased market value of shares, then the company's directors have managed profits to the shareholders' advantage.

Step 1

Add together all of a company's revenue and gains for the previous year to calculate overall income. Subtract all expenses, losses and tax liabilities from overall income to create net income.

Step 2

Cease calculating if net income is a negative figure. This means the company has no profits and so has no internal equity for the year.

Step 3

Subtract any stockholder dividends from net income if the company has profits. The remainder is the company's internal equity.

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