What is Shareholder’s Equity?
Shareholder’s Equity, also known as the book value or net worth of the company, is the value of the company to shareholders based on original investment into the company (How much money the company received from selling its shares) and retained earnings (profits of the company not paid out in dividends).
The example below is from Intel’s 2012 2nd quarter earnings 10Q filing.
As you can see below, Intel uses the term “Stockholder’s Equity”, this is just another name for Shareholder’s Equity.
(click to enlarge)
Shareholder’s Equity is calculated by:
This equates to:
or Shareholder’s Equity can also be calculated by:
For Intel’s balance sheet above, this equates to:
Shareholder’s equity is what would be left of the company if all debts had been paid off. Often times this is referred to as the company’s “Book Value”. Although the calculation is very simplified and unrealistic, the idea behind a company’s book value is that it provides a “minimum value” the company should trade for.
If a company had a book value of $1 billion, but had a market cap of only $800 million, logic says it would make a good investment as you are buying a company’s assets for 80 cents on the dollar.
(We can see here that Intel is far from trading below its book value with a Shareholder’s Equity of about $49 billion compared to a market cap or market value of $110 billion, at time of writing)
Many investors will see a stock trading below its book value and buy the stock based solely on that metric.
However, if investors are going to use a company’s book value as a method to evaluate a company, pay special attention to the quality and valuation of the assets on the balance sheet. Many times overvaluing intangible assets or other assets inflate a company’s total assets figure and thereby inflating the company’s book value.
For this reason many analysts like to use the much more conservative calculation of book value using only tangible assets. This gives you a “Price to Tangible Book Value” ratio to value the company by.
Read more on Shareholder Equity
We discuss how to begin evaluating a company based on its statement of shareholder equity here: Evaluating Financial Statements- Shareholder Equity
Interpretation of Financial Statements, Defines Shareholder Equity as:
“The interest of the stockholders in the company, as measured by the capital and surplus. Also the protection afforded a senior issue by reason of the existence of the junior investment.
The stockholders interest is called capital and surplus. These are liabilities only in the sense that they represent the amount for which the company is responsible to the stockholders. Truly, they are the arithmetical difference between the assets and the liabilities, and they are placed among the liabilities to bring the balance sheet into balance.”
Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports, Defines Shareholder Equity as:
“Worth, net worth, equity, owners equity and shareholders equity all mean the same thing – The value of the enterprise belonging to its owners.”
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