Shareholders’ equity is the residual value of a company’s assets if the company were to pay off its debts, and represents its shareholders’ total stake in the company. A company reports shareholders’ equity on its balance sheet, which is one of its financial statements. The balance sheet shows a company’s financial position only at a single point in time at the end an accounting period. To determine the approximate level of shareholders’ equity the company held throughout an accounting period, you must calculate its average shareholders’ equity between two periods. A higher average shareholders’ equity is typically better for shareholders.
Obtain a company’s balance sheet from its most recent accounting period and the balance sheet from its previous accounting period. You can find a public company’s balance sheet in its 10-Q quarterly reports or its 10-K annual reports, which you can get for free from the U.S. Securities and Exchange Commission’s EDGAR website (sec.gov/edgar/searchedgar/companysearch.html).
Find the amounts that make up the company’s total shareholders’ equity listed at the bottom of the “Shareholders’ Equity” section of its most recent balance sheet and on the balance sheet from the previous period. For example, assume the company’s most recent balance sheet shows $500,000 in total shareholders’ equity and that its previous period’s balance sheet shows $600,000 in total shareholders’ equity.
Add the amounts of total shareholders’ equity from the two consecutive balance sheets. In this example, add $500,000 and $600,000 to get $1.1 million.
Divide the result by 2 to calculate the average shareholders’ equity. In this example, divide $1.1 million by 2 to get $550,000. This means the company held an average of $550,000 in shareholders’ equity throughout the accounting period.
- AccountingCoach; Owner's (Stockholders') Equity; Harold Averkamp
- AccountingCoach; Sample Balance Sheet; Harold Averkamp
- CPAClass.com: Accounting Ratios for Financial Statement Analysis
- Forbes. "5 Return-on-Equity Dividend Stocks Buffett and Lynch Would Love." Accessed May 6, 2020.
- Study Finance. "Return on Assets (ROA)." Accessed May 6, 2020.