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Shareholder Equity: Definition & Formula

Shareholder Equity: Definition & Formula
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  • 0:00 What Is Shareholder Equity?
  • 0:56 Formula
  • 1:46 Practice
  • 2:48 Lesson Summary
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Lesson Transcript
Instructor: Erin Ryan
One of most important things an investor is concerned about is shareholder equity. In this lesson, you'll learn what shareholder equity is and how to calculate it, and then you can test your knowledge with a short quiz.

What Is Shareholder Equity?

When an entrepreneur is running a business, there are many factors to keep in mind, from marketing plans to business laws to human resources, and one of the most important things to keep in mind is the financial health of the business. One way to determine a company's financial health is by calculating shareholder equity, which is the value of the business after taking into account all long-term and short-term liabilities. In other words, it's the net worth of the company as an asset; basically, how much money the shareholders would receive if you liquidated the company's assets and paid back its debts. Investors are particularly interested in shareholder equity, as it reveals fluctuations in essential components of equity, such as retained earnings. Now that we know what shareholder equity is, let's take a look at exactly how to calculate it.

Formula

We calculate shareholder equity by subtracting the liabilities from assets, so our formula is:

Shareholder Equity = Assets - Liabilities

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