Formula to Calculate Total Equity of a Company

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 company assets 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 metric 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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However, there are different classes of ownership units, including preferred stockPreferred StockA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more 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 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 = $750,000Total 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 reportsAnnual 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 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 calculate the total equity using 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)

  • Total Equity = 35,867 + 98,330 – 150Total Equity = 1,34,047

  • 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

Understanding 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 company’s shareholder’s equity, which is represented by their shares. The shareholder’s equity is dependent on the total equity of the company. Thus, a shareholder concerned for his earnings will also be concerned for the company.

Purchasing a company’s stock over 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 dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more. All these benefits eventually create a shareholder’s ongoing interest in the company’s equity.

This article has been a guide to Equity Formula. Here we learn how to calculate total equity using its formula, practical examples, and downloadable excel template. You can learn more about Accounting from the following articles –

  • Share at Par Value FormulaShare At Par Value FormulaPar value of shares is the minimum share value determined by the company issuing such shares to the public. Companies will not sell such shares to the public for less than the decided value.read moreCalculate Share CapitalFormula of Owner’s EquityCalculate Shareholder’s Equity