# Stockholders' Equity: What It Is, How to Calculate It, and Example

> **Definition**
>
> Stockholders' equity is the value of a company's assets left for shareholders after the company pays all of its liabilities.

## What Is Stockholders' Equity?

Stockholders' equity, also known as shareholder equity, is the total amount of assets that a company would retain if it paid all of its debts.

That is, it indicates how much money would be available to the company's shareholders if it goes bankrupt and is forced to pay all of its liabilities.

Stockholders' equity is a measurement of the general financial health of the company. If the number for stockholders' equity is negative, it may warn of impending bankruptcy (particularly if it is due to a high debt load).

### Key Takeaways

*   Stockholders' equity is one measurement of a company's general financial health. 
*   It represents shareholders' stake in a company's assets after deducting liabilities from them.
*   The stockholders' equity formula is total assets minus total liabilities.
*   A negative equity figure means the company's debts are greater than its assets.
*   Prolonged negative stockholders' equity suggests that a company is in financial trouble.

![Stockholders' Equity: The remaining assets available to shareholders after all liabilities have been paid.](https://www.investopedia.com/thmb/ZrVCEqpO-QhgBNipRfHFP1KloC4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Stockholdersequity_Sketch_final-5230009146b749cc85d8b57339a52dad.png)

*A positive stockholders' equity is a sign of a company's financial soundness, whereas a negative balance can be a sign of insolvency. — Investopedia / Michela Buttignol*

## How Stockholders' Equity Works

Stockholders' equity is often referred to as the [book value](https://www.investopedia.com/terms/b/bookvalue.asp) of the company. It comes from two primary sources:

1.  Money that a company acquires when it sells shares to the public
2.  [Retained earnings (RE)](https://www.investopedia.com/terms/r/retainedearnings.asp) accumulated by the company over time through its operations

In most cases, retained earnings are the largest component of stockholders' equity. This is especially true of companies that have been in business for many years.

Conceptually, stockholders' equity is useful as a means of judging the amount of money that a business has retained.

### Negative or Positive

Shareholder equity can be negative or positive. If positive, the company has enough assets to cover its liabilities. If negative, the company's liabilities exceed its assets. If negative equity is prolonged, the result is balance sheet [insolvency](https://www.investopedia.com/terms/i/insolvency.asp). 

Many investors view companies with negative shareholder equity as risky or unsafe investments.

Still, shareholder equity alone is not a definitive indicator of a company's well-being. It should be used in conjunction with other tools and metrics to [analyze a company's financial health](https://www.investopedia.com/terms/s/stock-analysis.asp).

## Calculate Stockholders' Equity

Shareholders' equity may be calculated in either of two ways:

1.  Total assets minus total liabilities
2.  Share capital plus retained earnings minus [treasury shares](https://www.investopedia.com/terms/t/treasurystock.asp)

#### The Formula

$\text{Stockholder's Equity} = \text{Total Assets} - \text{Total Liabilities}$

A company's [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp) display its total assets and total liabilities:

*   **Current Assets** are assets that can be converted to cash within a year. They include cash, accounts receivable, and inventory.
*   **Non-Current Assets** are long-term assets that cannot be converted to cash or consumed within a year, such as investments; [property, plant, and equipment](https://www.investopedia.com/terms/p/ppe.asp), and intangibles such as patents.

[Total liabilities](https://www.investopedia.com/terms/t/total-liabilities.asp) include current and long-term liabilities:

*   **Current liabilities** are debts due to be paid within one year, such as accounts payable and taxes payable. 
*   **Long-term liabilities** are obligations due to be paid over periods longer than one year, such as bonds payable, leases, and pension obligations.   
    

> **Important**
>
> The stockholders' equity formula is also known as the balance sheet equation because assets and liabilities are found on a company's balance sheet.

## Stockholders' Equity and Retained Earnings

Retained earnings are the portion of [net income](https://www.investopedia.com/terms/n/netincome.asp) that a company holds on to as additional equity capital. Thus they are part of stockholders' equity. They represent returns on total stockholders' equity that had been reinvested in the company.

These earnings, [reported on the income statement](https://www.investopedia.com/ask/answers/030215/how-are-retained-earnings-related-companys-income-statement.asp), accumulate over time. At some point, accumulated retained earnings may exceed the amount of contributed equity capital and can eventually grow to be the main source of stockholders' equity.

## Stockholders' Equity and Paid-in Capital

Companies fund their capital purchases with equity investments and borrowed capital. The equity capital/stockholders' equity can also be viewed as a company's net assets (total assets minus total liabilities). 

Investors contribute their share of [paid-in capital](https://www.investopedia.com/terms/p/paidincapital.asp) when they buy shares of stock offered by a company to the public (e.g., in an initial public offering). This is the basic source of total stockholders' equity.

The amount of paid-in capital from an investor is a factor in determining the individual's ownership percentage.

## Stockholders' Equity and the Impact of Treasury Shares

Companies may decide to return a portion of stockholders' equity to their stockholders. This reverse capital exchange between a company and its stockholders is known as [share buybacks](https://www.investopedia.com/terms/b/buyback.asp). Importantly, share buybacks reduce stockholders' equity.

Shares bought back by companies become [treasury shares](https://www.investopedia.com/ask/answers/what-is-treasury-stock/), and their dollar value is noted in the treasury stock [contra account](https://www.investopedia.com/terms/c/contraaccount.asp).

Treasury shares continue to count as issued shares but they are not considered to be outstanding shares and are thus not included in dividends or the calculation of [earnings per share (EPS)](https://www.investopedia.com/terms/e/eps.asp).

Treasury shares can be reissued to stockholders for purchase when companies need to raise more capital. If a company doesn't prefer to hang on to the shares for future financing, it can [retire the shares](https://www.investopedia.com/terms/r/retiredsecurities.asp).

> **Fast Fact**
>
> Equity is the stockholders' claim on the residual value of a company after debts and other liabilities have been paid.

## Example of Stockholders' Equity

Below is the [balance sheet](http://investor.apple.com/financials.cfm) for Apple [(AAPL)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl) as of the end of 2024.

![Apple Balance Sheet, Q32023](https://www.investopedia.com/thmb/enKRyk5s5Hr1Rm39lrqU_gSn0hU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/23-08-03Applereportsthirdquarterresults-f374011369534571b3cb280b1ddc2ea8.jpg)

*Apple Balance Sheet.*

It shows that:

*   Total assets were $335.03 billion
*   Total liabilities were $274.76 billion 
*   Stockholders' equity was therefore $60.27 billion ($335.03 billion - $274.76 billion).

The value of $60.27 billion in stockholders' equity represents the amount of money that would be left for Apple's shareholders if Apple [liquidated](https://www.investopedia.com/terms/l/liquidate.asp) all of its assets and paid off all of its liabilities.

Stockholders' equity is an effective metric for determining the net worth of a company, but it should be used in tandem with the analysis of other financial statements, including the [income statement](https://www.investopedia.com/terms/i/incomestatement.asp), and [cash flow statement](https://www.investopedia.com/investing/what-is-a-cash-flow-statement/).

## What Is Included in Stockholders' Equity?

Total equity includes the value of all of the company's short-term and long-term assets minus all of its liabilities. It is the real book value of a company.

## Is Stockholders’ Equity Equal to Cash on Hand?

No. Cash and cash equivalents would only represent a small piece of a company's financial wealth. A company may be rich in assets like property, plant, and equipment, and relatively poor in hard cash.

## Why Is Stockholders' Equity Important to Investors?

Stockholders' equity is important to investors and other stakeholders because, as a measurement of a company's net value (or net worth), it can provide them with an idea of the financial stability and potential for success of a company.

## The Bottom Line

Investors and analysts look to many numbers to evaluate the financial health of a company. One of these is shareholders' equity.

This straightforward figure is the sum of all of its assets minus all of its liabilities. That is, how much would a company be worth if it was forced to immediately pay off all of its debts.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[10-Q for the Quarterly Period Ended Dec. 28, 2004, Apple, Inc.](https://www.sec.gov/Archives/edgar/data/320193/000032019325000008/aapl-20241228.htm)"