Formula to Calculate Total Equity of a Company
Equity Formula states that the total value of the equity of the company is equal to the sum of the total assets minus the sum of the total liabilities.
Here total assets refers to assets present at the particular point and total liabilities means liability during the same period of time.
Equity is also known as shareholder’s equity and is easily available as a line item in the balance sheet. We can term equity as the net value of a business. It is the amount received by the shareholders if we liquidate all the assets of the company and repay all the debt. In short, equity measures the net worth of a company or leftover after deducting all the liabilities value from the value of the assets. As such, it is a common financial metrics which is used by most of the analysts to assess the financial health of a company.
Mathematically, an equation of equity represented as,
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For eg:
Source: Equity Formula (wallstreetmojo.com)
However, there are different classes of ownership units, which include preferred stock and common stockCommon StockCommon stocks are the number of shares of a company and are found in the balance sheet. It is calculated by subtracting retained earnings from total equity.read more. Further, there are various sections in the shareholders’ equity of the balance sheetShareholders' Equity Of The Balance SheetShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period.read more, such as common stock, additional paid-in capitalAdditional Paid-in CapitalAdditional paid-in capital or capital surplus is the company's excess amount received over and above the par value of shares from the investors during an IPO. It is the profit a company gets when it issues the stock for the first time in the open market.read more, retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more, and treasury stockTreasury StockTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. read more. Consequently, an alternative approach for the calculation of total equity is as below,
Step by Step Calculation of Equity
The calculation of the equity equation is easy and can be derived in the following two steps:
- Step 1: Firstly, pull together the total assets and the total liabilities from the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more.
- Step 2: Finally, we calculate equity by deducting the total liabilities from the total assets.
On the other hand, we can also calculate equity by using the following steps:
- Step 1: Firstly, bring together all the categories under shareholder’s equity from the balance sheet. I.e., common stock, additional paid-in capital, retained earnings, and treasury stock.
- Step 2: Then, add up all the categories except the treasury stock, which has to be deducted from the sum, as shown below.
Total Equity = Common Stock + Preferred Stock + Additional Paid-in Capital + Retained Earnings – Treasury Stock
Examples
Example #1
Let us consider an example to compute the total equity for a company called ABC Limited. It is in the business of manufacturing customized roller skates for both professional and amateur skaters. As per the balance sheet of ABC Limited for the financial year ended on March 31, 20XX, the total assets are $750,000, and the total liabilities are $450,000.
Given,
- Total Assets = $750,000
- Total Liabilities = $450,000
Therefore, the calculation of total equity can be done as,
- Total Equity = $750,000 – $450,000
Therefore, Total Equity will be –
- = $300,000
Therefore, the total equity of ABC Limited as of March 31, 20XX is $300,000.
Example #2
Let us take the real-life example of Apple Inc.’s annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more as on September 29, 2018, and September 30, 2017, for the calculation of total equity. The following information is available:
So from the above-given information, we will do the calculation for the total equity using both the equations mentioned above.
#1 – Total Equity = Total Assets – Total Liabilities
Using this equation, we will do the calculation of total equity for both September 29, 2018, and September 30, 2017
Total Equity as on Sep 30, 2017
- Total Equity = 3,75,319-2,41,272;
- Total Equity = 1,34,047;
Total equity as on Sep 29, 2018
- Total Equity = 3,65,725 – 2,58,578;
- Total Equity = 1,07,147;
#2 – Total Equity = Common stock and additional paid-in capital + Retained earnings + Accumulated other comprehensive income/(loss)
Using this equation, we will do the calculation of total equity for both September 29, 2018, and September 30, 2017
Total Equity as on Sep 30, 2017
- Total Equity = 35,867 + 98,330 – 150
- Total Equity = 1,34,047
Total equity as on Sep 29, 2018
- Total Equity= 40,201 + 70,400 +(-3,454)
- Total Equity = 107,147
It means that Apple Inc.’s equity has decreased. From $134,047 Mn as of September 30, 2017, to $107,147 Mn as of September 29, 2018.
Relevance and Use of Equity Formula
The understanding of the equity equation is critical from an investor’s point of view. It represents the real value of one’s stake in an investment. Shareholders of a company are typically interested in the shareholder’s equity of the company, which is represented by their shares. The shareholder’s equity is dependent on the total equity of the company. Thus a shareholder who is concerned for his earnings will also be concerned for the company.
Purchasing stock of a company over some time gives the privilege or the right to vote in a board of directors elections. It also yields capital gains for the shareholder and potentially dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more. All these benefits eventually create a shareholder’s ongoing interest in the equity of the company.
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