What Is Shareholder Equity (SE) and How Is It Calculated?

What Is Shareholder Equity (SE)?

Shareholder equity (SE) is a company's net worth and it is equal to the total dollar amount that would be returned to the shareholders if the company must be liquidated and all its debts are paid off. Thus, shareholder equity is equal to a company's total assets minus its total liabilities.

SE is a number that stock investors and analysts look at when they're evaluating a company's overall financial health. It helps them to judge the quality of the company's financial ratios, providing them with the tools to make better investment decisions.

Retained earnings are part of shareholder equity as is any capital invested in the company.

Understanding Shareholder Equity (SE)

Shareholder equity represents the total amount of capital in a company that is directly linked to its owners. That is, it is the dollar value of the company to its owners.

If the company ever needs to be liquidated, SE is the amount of money that would be returned to these owners after all other debts are satisfied.

The Formula for Calculating SE

All the information needed to compute a company's shareholder equity is available on its balance sheet.

You can figure out the total SE of a company using the following formula:

$Shareholder Equity = Total Assets - Total Liabilities$ShareholderEquity=TotalAssets−TotalLiabilities

This formula is also known as the accounting equation or the balance sheet equation. The balance sheet holds the data needed for the accounting equation. So, the steps to calculate shareholder equity are as follows:

1. Locate the company's total assets on the balance sheet for the period.
2. Total all liabilities, which should be a separate listing on the balance sheet.
3. Locate the total shareholder's equity and add the number to the total liabilities.
4. Total assets will equal the sum of liabilities and total shareholder equity.

Current and Long-Term Assets

Total assets include current and noncurrent assets. Current assets include cash and anything that can be converted to cash within a year, such as accounts receivable and inventory.

Long-term assets are possessions that cannot reliably be converted to cash or consumed within a year. They include investments; property, plant, and equipment (PPE), and intangibles such as patents.

Current and Long-Term Liabilities

Total liabilities consist of current and long-term liabilities.

Current liabilities are debts typically due for repayment within one year. This includes accounts payable (AP) and any outstanding taxes.

Long-term liabilities are obligations that are due for repayment over periods longer than one year. Companies may have bonds payable, leases, and pension obligations under this category.

Positive vs. Negative Shareholder Equity

SE can be either negative or positive. Negative SE means a company's liabilities exceed its assets. If it's positive, the company has enough assets to cover its liabilities.

If a company's shareholder equity remains negative, it is considered to be balance sheet insolvency. 

Understanding Retained Earnings

Retained earnings are part of shareholder equity. This is the percentage of net earnings that is not paid to shareholders as dividends. 

Retained earnings should not be confused with cash or other liquid assets. The retained earnings are used primarily for the expenses of doing business and for the expansion of the business.

Moreover, liquidation value is not the same as shareholder equity. During a liquidation process, the value of physical assets is reduced and there are other extraordinary conditions that make the two numbers incompatible.

Many investors view companies with negative shareholder equity as risky or unsafe investments. But shareholder equity alone is not a definitive indicator of a company's financial health. If used in conjunction with other tools and metrics, the investor can accurately analyze the health of an organization.

Examples of Shareholder Equity

Here's a hypothetical example to show how shareholder equity works. Let's assume that ABC Company has total assets of $2.6 million and total liabilities of $920,000. In this case, ABC Company's shareholder equity is $1.68 million.

Real-World Examples

Now let's take a look at a few real-world examples, notably the world's two largest soft drink companies:

• PepsiCo (PEP) shareholder equity for the quarter ending March 31, 2023, was $17.175 billion. That was a 6.25% decline year-over-year. This figure represents shareholder equity for common stockholders.
  
• Coca-Cola Co., Pepsi's bigger rival, reported shareholder equity for the same period at $26.868 billion. That's a 0.1% increase year-over-year.
  

The Bottom Line

There's a cautionary line that appears in every financial prospectus: "Past returns are no guarantee of future performance."

Successful investors look well beyond today's stock price or this year's price movement when they consider whether to buy or sell.

Shareholder equity is one of the important numbers embedded in the financial reports of public companies that can help investors come to a sound conclusion about the real value of a company.