Shareholders' equity represents the value returned to shareholders if a company is liquidated after all debts are paid. It is calculated as the residual value of a company's assets after deducting its liabilities.
For example, if Alpha Corporation has total assets of $600,000 and total liabilities of $400,000, its shareholders' equity would be $200,000. Shareholders' equity comprises common stock, preferred stock, retained earnings, and treasury stock.
Common and preferred stock represent the capital invested by shareholders. Retained earnings are profits reinvested in the company rather than distributed as dividends, while treasury stock refers to shares the company has repurchased.
Shareholders' equity is an essential measure of a company's financial health. It can be increased in several ways: increasing retained earnings, increasing paid-in capital, decreasing liabilities, and selling depreciated assets. A rising shareholders' equity indicates that a company is profitable and managing its assets effectively, which can attract investors.
