Although the terms shareholder equity and shareholder value sound similar, they are nothing alike in meaning and usage. Shareholder equity is an accounting term used in balance sheet calculations, while shareholder value is a stock market term. Shareholder equity has a very specific and precise meaning, however, shareholder value is fairly vague and has different meanings in different contexts.
A company’s balance sheet lists its assets and liabilities; the difference between them is the company’s net worth – that which actually belongs to the shareholders, their equity. It’s similar to homeowner equity in that a house is an asset, and the homeowner owes a mortgage on it, which is a liability with an unpaid balance. The difference between the unpaid balance and the value of the house is the homeowner’s equity. In the same way that homeowners who owe more on their house than it is currently worth are said to be upside down, shareholder equity can be a negative number when a company’s liabilities exceed its assets. Negative shareholder equity is sometimes called shareholder deficit.
Shareholder value denotes the value of a shareholder’s stake in a company. The more the stake is worth, the greater the shareholder value. The term is often used in the context of increasing shareholder value, which is essentially increasing the value of their stakes.
Ways to Increase Shareholder Value
The two main ways to shareholder value increases are through an increase in the stock price, and dividends. Improving, or enhancing, shareholder value is a relative notion. For example, if a company’s stock is declining and shareholder stakes are shrinking, a company can “enhance” shareholder value by stemming a further stock price decline. A company can also enhance shareholder value by improving its balance sheet.
Balance Sheet Improvements
If a company grows its assets or pays down its liabilities, its balance sheet improves, which means its net worth, or shareholder equity, goes up. This is sometimes achieved by means of financial accounting methods. For example, borrowing from the bank or issuing bonds increases liabilities, while issuing new stock does not. A company can improve its balance sheet by selling stock to pay down bank debt or bonds. Short-term liabilities, which is debt that matures in 12 months or less, are of concern to shareholders because a company may be forced into bankruptcy if it fails to pay them off on time. Successful refinancing of short-term debt with long-term debt strengthens a balance sheet.