How Is Equity and Shareholders' Equity Different?
A company’s equity typically refers to the ownership of a public company. For example, investors might own shares of stock in a publicly traded company.
Equity could also refer to the level ownership of an asset. For example, an owner of a house with a mortgage on it might have equity in the house, but not own it outright. The home owner’s equity would be the difference between the market price of the house and the current mortgage balance.
Shareholders’ equity is the net amount of a company’s total assets and total liabilities, which are listed on a company’s balance sheet. In part, shareholders’ equity shows how much of a company’s operations is financed by equity.
Shareholders’ equity is the amount that would be returned to shareholders if all the company’s assets were liquidated and all its debts repaid. In short, shareholders’ equity measures the company’s net worth.
Shareholders’ equity also includes retained earnings, which is the amount profit left over that’s saved or retained to be used to pay dividends, reduce debt, or buy back shares of stock.
Market analysts and investors prefer to see a good, stable balance between the amount of retained earnings that a company pays out to investors in the form of dividends and the amount retained to reinvest back into the company.
Shareholders’ equity is an important metric in determining the return being generated versus the total amount invested by equity investors. For example, ratios like return on equity (ROE), which is the result of a company’s net income divided by shareholders’ equity, is used to measure how well a company’s management is using its equity from investors to generate profit.
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