Equity Formula

The equity Formula states that the total value of the company's equity is equal to the sum of the total assets minus the total liabilities.

Here total assets refer to assets present at the particular point and total liabilities means liability during the same period.

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,

Total Equity = Total Assets – Total Liabilities

However, there are different classes of ownership units, including preferred stock and common stock. Further, there are various sections in the shareholders' equity of the balance sheet, such as common stock, additional paid-in capital, retained earnings, and treasury stock. Consequently, an alternative approach for the calculation of total equity is as below,

Total Equity = Common Stock + Preferred Stock + Additional Paid-in Capital + Retained Earnings – Treasury Stock

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 sheet.
• 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

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 reports 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)

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.

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 dividends. All these benefits eventually create a shareholder's ongoing interest in the company's equity.