What is shareholder equity?

Shareholder equity represents the ownership interest that shareholders have in a company after all liabilities are deducted from its total assets. It is calculated using the formula: Shareholder Equity = Total Assets - Total Liabilities. This figure reflects the net worth of the company and indicates what shareholders would receive if the company were liquidated. Essentially, it represents the residual claim that shareholders have on the company’s assets after all debts have been settled.

This concept is fundamental to understanding the financial health of a business, as it provides insight into the company's solvency and financial structure. A positive shareholder equity indicates that a company has enough assets to cover its liabilities, which can enhance investor confidence and potentially increase stock value.