If you’re the type of person who likes to do your own financial analysis on different companies before you invest in them, then you’ve probably come across the term shareholders’ equity before. Shareholders’ equity is a metric that is used to assess a company’s financial health and is one of the many factors that influence a stock’s price.
This article will take a quick look at what shareholders’ equity is and how you can calculate it.
What is shareholders’ equity?
According to Investopedia, shareholders’ equity is the total net worth of a company and the amount that would be returned to shareholders if all of the company’s assets were sold and their debts repaid. It’s a little bit like calculating your own net worth. You take everything of value that you own (home, checking/savings accounts, stocks, etc.), subtract all your debt (outstanding mortgage, credit card debt, student loan debt), and are left with your net worth. This can be a positive or a negative number.
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The process works the same exact way for companies. For example, let’s say that Walmart sold all of their existing inventory as well as their warehouses. They then took their cash on hand and repaid all of their mortgages, creditors, and anyone else that they owed money to. Whatever is left over would be considered their shareholders’ equity.
In general, this metric is used to gauge a company’s financial health. Now, let’s take a look at how you can calculate it.
How to calculate shareholders’ equity
One important thing to note is that every company will calculate their own shareholders’ equity and publicly release this information on their balance sheet. This information is usually updated and release about 4 times a year and released alongside quarterly earnings or annual reports.
For example, a quick search for Walmart’s 2021 Annual Report will pull up all of this information and informs us that Walmart’s shareholders’ equity was about $90 billion as of Q3 2021.
Now, a company like Walmart has tons of moving pieces. They operate over 10,000 stores, have 2 million associates working for them, and sell just about every product imaginable. However, even for a company of Walmart’s size, calculating shareholders’ equity is fairly straightforward.
The formula to determine shareholders’ equity looks like this:
Total Assets − Total Liabilities = Shareholders’ Equity
Since Walmart is so large, it might take a little bit more time to determine all of their assets and liabilities. However, once you have obtained this information, you can perform the calculations very easily.
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