Common stockholders' equity measures the amount of money that would be distributable to common shareholders if a company were to liquidate its assets. Common shareholders are low on the totem pole of people to be paid and only receive the proceeds of the sale remaining after a company pays off all its creditors.
Elements of Common Stockholders' Equity
Common shareholders' equity is simply the sum total of company assets minus company liabilities. However, behind this simple calculation are several components. Common stockholders' equity consists of a company's share capital and retained earnings minus its treasury stock.
Share capital refers to the money a company received for shares initially sold. For example, if a company sold one million shares at $10 each, it has $10 million in share capital, no matter the current stock price.
The retained earnings add the amount of profit held by the company because it represents money added to the value of the company. Treasury stock refers to shares repurchased by the company, so they are not currently owned by common shareholders. A company might sell its treasury stock at a later date to raise capital.
Assets and Liabilities
The easiest way to calculate common stockholders' equity from a company's balance sheet is to subtract the company's assets from its liabilities. A company's assets include property the company owns, cash in its accounts and money it is owed. A company's liabilities include long-term debt, expenses and accounts payable.
For example, if a company has $12 million in assets and $7 million in liabilities, the company has $5 million in common stockholders' equity.
If stockholders' equity is positive, the company has enough assets to pay its liabilities. Investors can use this financial metric to evaluate the strength and long-term sustainability of the company.
Read More: Is Stockholder's Equity Considered Debt?
Common Stock Equity Formula
The common shareholders' equity per share formula measures the book value of each share, rather than common shareholders' equity in total. To find the common shareholders' equity per share, divide the total equity by the number of shares outstanding.
For example, if a company has a total of one million shares outstanding and a total shareholders equity of $15 million, the equity per share equals $15 million divided by 1 million, or $15 per share. To find your equity, multiply the equity per share by the number of shares you own.
Price Does Not Equal Valuation
The value of common stockholders' equity is usually different than the value of all the common shares of stock put together. Common shareholders' equity includes the price at which the company sold the shares, not the current valuation. Therefore, trading of a company's shares on the open market does not affect the company's common stockholders' equity.
The market price per share is also affected by investor expectations: For companies that are expected to grow, the price will be higher. However, if the company is losing sales and in danger of closing, the price will fall.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."