Definition
Shareholders' Equity
Shareholders' equity is the residual interest in a company's assets after deducting liabilities, comprising share capital, reserves and retained earnings.
Also called net worth or book value, shareholders' equity is what would theoretically remain for owners if all assets were sold and liabilities settled. On the balance sheet it splits into share capital (paid-up value of shares) and reserves and surplus.
Growth in equity, driven by retained earnings, signals value creation, while erosion from losses is a red flag. Returns are measured against it via ROE, and its per-share value, the book value, anchors price-to-book valuation, especially for banks and financial firms.
Related terms
- Book ValueBook value is a company's net worth on its balance sheet, total assets minus total liabilities, representing what shareholders own on paper.
- Retained EarningsRetained earnings are the cumulative profits a company has kept and reinvested rather than paid out as dividends, forming part of shareholders' equity.
- Share Capital vs ReservesShare capital is the par value of shares issued to owners, while reserves are accumulated profits and other surpluses; together they form shareholders' equity.
- Return on Equity (ROE)ROE measures how much net profit a company earns for each rupee of shareholders' equity, showing how efficiently it puts owners' money to work.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.