Introduction
Equity (Shareholders' Equity or Stockholders' Equity) represents the net value of the company for shareholders. It is Assets minus Liabilities.
Explanation
Equity has two main components: 1) Common Stock (capital contributed by shareholders in share issues), 2) Retained Earnings (accumulated profits not distributed as dividends).
Formula
Equity = Total Assets - Total Liabilities
Equity = Common Stock + Retained Earnings + Others
Example
Startup vs Apple: - Startup: Common Stock $100M (venture capital), Retained Earnings -$50M (accumulated losses) → Equity $50M - Apple: Common Stock $65B, Retained Earnings $-5B (distributed more than it retained), Others $10B → Equity $70B
How to read it
Positive equity = company has more assets than debts. Negative equity = company owes more than it owns (rare, typical in turnarounds or companies with a lot of share repurchases). Negative Retained Earnings are not always bad: Apple has negative RE because it has distributed >$500B in dividends and buybacks. Red flag: equity declining rapidly = company burning value.
Key takeaways
- Equity = Assets - Liabilities
- Equity = Common Stock + Retained Earnings
- Common Stock = capital contributed by shareholders
- Retained Earnings = retained earnings
- Positive equity = more assets than debts
- Negative RE is not always bad (Apple)