Companies sell shares of their stocks as a way to raise money. Stockholders are individuals or companies that own shares of a company’s stock or have invested in that company. If you are a stockholder, understanding what the stockholder equity is can help you determine how much your investment in a company is worth.
The shareholder’s equity is essentially the amount of money the company is worth when you take into account all its assets and liabilities. For that reason, this figure is also commonly called a company’s net worth. It’s what would remain if the company in which you’re invested was to sell off everything it owns and pay off everything it owes. Since the investors own small pieces of the company, the remaining balance is what would then be distributed among the shareholders.
To find out what the shareholder equity is, you simply subtract the company’s total liabilities from its total assets. This is the simplest way to figure out stockholder equity. Another formula for determining shareholder equity is: assets equals liabilities plus x, where “x” stands for shareholder equity.
Skipping the Math
Publicly traded companies must submit certain financial documents to the Securities Exchange Commission and publish those same documents in their annual reports to investors. These documents are useful not just for getting data, like total assets and liabilities, used for calculating the shareholder equity, but also for finding the shareholder equity without having to do any math. In particular, a company’s income statement, balance sheet and statements of shareholder equity will yield this figure.
While the total stockholder equity represents how much money the company would have to give all stockholders if it settled all liabilities and sold off all assets, it does not represent what it would pay you as an individual investor. For this, you must calculate the earnings per share (EPS). The EPS tells you how much investors would receive per share owned in the company. It’s calculated by dividing the total net income by the amount of outstanding shares. Once you have the EPS, simply multiply it by the number of shares you own to determine how much your total number of shares is worth.