Equity

Published Dec 24, 2022

Definition of Equity

Equity is defined as the value of an asset or a company after subtracting all liabilities. That means it is the difference between the total assets and total liabilities of a company. It is also known as shareholders’ equity or owners’ equity.

Example

To illustrate this, let’s look at an imaginary company called ABC Inc. ABC Inc. has total assets of USD 1,000,000 and total liabilities of USD 500,000. That means the company’s equity is USD 500,000 (i.e., 1,000,000 – 500,000). This equity is owned by the shareholders of the company.

Why Equity Matters

Equity is an important concept for understanding the financial health of a company. It shows how much of the company’s assets are owned by the shareholders. A high equity ratio indicates that the company has a strong financial position and is less likely to default on its debts. On the other hand, a low equity ratio indicates that the company is highly leveraged and may be at risk of bankruptcy.

Equity is also important for investors. It shows how much of the company’s profits are available to be distributed to shareholders as dividends. Thus, investors should always look at the equity of a company before investing in it.