Common stockholders' equity is the value of a company's total assets after total liabilities are subtracted. Similar to net worth and book value, stockholders' equity is used as a metric of a company's financial health. The statement of stockholders' equity highlights reveals how well a company manages its equity accounts to grow and generate profit.
What Is Included in Common Stockholders' Equity?
According to the Corporate Finance Institute, the total assets of a company include current assets, such as cash, accounts receivable and inventory, as well as noncurrent assets, such as buildings and real estate. Intangible assets, such as patents, are also included in a company's total assets. On the other hand, a company's total liabilities include current liabilities, including accounts payable, and noncurrent long-term liabilities, like business loans and leases.
Shareholders’ equity is the difference between all assets and liabilities. If a company were to undergo liquidation, stockholder equity would be the leftovers. The company's remaining money would be distributed to holders of preferred shares and common stock. Share capital, retained earnings, treasury stock and outstanding shares are the major components of determining stockholder equity.
How to Calculate Common Stockholders' Equity
As the University of North Georgia explains, common stockholders’ equity, also called shareholders' equity or liquidation value, is the total of company assets minus company liabilities in a given reporting period. Behind this simple calculation are several components:
- Share capital refers to money a company receives 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. Share capital and additional paid-in capital boost shareholders' equity.
- Retained earnings represent additional money added to the value of a company minus operating costs and shareholder dividend distributions. Profit flows into shareholder equity as retained earnings. The change in retained earnings minus dividend payments tells you the company's net income.
- Treasury stock or treasury shares refer to shares repurchased by the company. A company might sell treasury stock to raise capital, which, in turn, lowers shareholder equity.
While the basic calculation is total assets minus total liabilities, using the components above, the equation is more specifically: Share Capital + Retained Earnings - Treasury Shares = Stockholders’ Equity.
For example, if a statement of shareholders' equity begins with a balance of $100,000 and the company issues $10,000 in common and preferred stock and brings in $10,000 from business activity, the total assets are now $120,000. If $5,000 in dividends were paid out and there was a repurchase of $5,000 in treasury shares, the new balance of stockholder equity is $110,000.
Common Stockholders' Equity Per Share
The common shareholders' equity per share formula measures the book value of each share rather than common shareholders' equity in total. To find shareholders' equity per share, divide the total equity by the number of shares outstanding.
If the company above, with a shareholder equity of $110,000, has 10,000 outstanding shares, the equity per share is $11. A shareholder would multiply the equity per share by the number of shares owned to find their individual owner's equity.
Market Capitalization and Equity
Common shareholders' equity includes the price at which the company sold the shares, not the current valuation. A company's market valuation is determined by taking the market value of a share of company stock and multiplying it by the number of outstanding shares. This is not the same as shareholder equity and is just another way investors try to assess a company's valuation.
Stockholders' Equity on a Company's Balance Sheet
The company balance sheet is a financial statement showing a company's assets, liabilities and owner's equity. This example from SCORE details the line items a business will track to record the business' financial health. Toward the end of the balance sheet, after assets and liabilities are accounted for, shareholders' equity is reflected in the Owners’ Equity section.
The U.S. Securities and Exchange Commission requires publicly reporting companies to file quarterly and annual reports, including balance sheets.
Common Questions About Stockholders' Equity
Which Common Transactions Affect Stockholders' Equity Accounts?
Any changes in the factors affecting the difference in company assets vs. liabilities will impact stockholders' equity accounts. When a company sells more stock, equity increases. If it has to repurchase treasury stock, equity decreases. In general, most transactions that impact the company's balance sheet will eventually affect stockholders' equity.
Is Stockholders' Equity Equal to Cash on Hand?
Cash on hand, reflected in a company's cash flow statement, is separate from stockholders' equity. It reflects cash and cash equivalents, liquid assets that a company can quickly access if needed. Cash on hand is included in the total assets used to calculate stockholders' equity but is only part of the picture.
How Is Debt-to-Equity Ratio Related to Stockholders' Equity?
CFI demonstrates that a company's debt-to-equity ratio can be calculated by dividing total liabilities by shareholders' equity. The ratio compares creditors' stake in a company to shareholders' or how much the company relies on debt to grow. For instance, a 0.5 debt-to-equity means that for every $1 of equity, 50 cents has been financed. Benchmarks for this ratio vary based on the industry and age of a company.
Melissa is a writer and editor from Chicago, with a background in small business ownership. After selling her business, she moved into marketing for nonprofits and now manages volunteers at a large medical association. She is a writing and editing contractor and contributed to dozens of blogs and websites.