{"id":1324,"date":"2024-02-11T11:29:00","date_gmt":"2024-02-11T11:29:00","guid":{"rendered":"https:\/\/www.experlu.co.uk\/blog\/?p=1324"},"modified":"2025-11-13T13:51:04","modified_gmt":"2025-11-13T13:51:04","slug":"what-is-equity-and-how-do-you-calculate-it","status":"publish","type":"post","link":"https:\/\/www.experlu.co.uk\/blog\/what-is-equity-and-how-do-you-calculate-it\/","title":{"rendered":"What is equity, and how do you calculate it?"},"content":{"rendered":"\n<p>Equity is an important financial term with varying meanings. Often when someone says equity, they mean either owner&#8217;s equity\/ shareholder&#8217;s equity. It represents the net worth or book value of a company or a business.<\/p>\n\n\n\n<p><strong>This blog post is divided into the following sections:<\/strong><\/p>\n\n\n\n<div class=\"outline_two\">\n    <h2>Table of Content<\/h2>\n    <ul>\n        <li><a href=\"#What_is_equity?\">What is equity?<\/a><\/li>\n        <li><a href=\"#Why_is_equity\">Why is equity important?<\/a><\/li>\n        <li><a href=\"#What_is_the\">What is the formula for calculating equity?<\/a><\/li>\n        <li><a href=\"#What_are_the\">What are the steps of calculating equity?<\/a><\/li>\n        <li><a href=\"#_What_is_positive\">What is positive and negative equity?<\/a><\/li>\n    <\/ul>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"What_is_equity?\">What is equity?<\/h2>\n\n\n\n<p>The equity of a company, also known as the shareholders&#8217; equity, represents a company&#8217;s net worth. It is the amount returned to the shareholders in case of liquidation of a company.<\/p>\n\n\n\n<p>It can be easily found as a line item in the company&#8217;s <a href=\"https:\/\/www.experlu.co.uk\/dictionary\/balance-sheet\/\"><span class=\"has-inline-color has-vivid-purple-color\">balance sheet<\/span><\/a>. Equity is a crucial financial metric to evaluate the financial health of a company.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"Why_is_equity\"><a><\/a>Why is equity important?<\/h2>\n\n\n\n<p>Equity represents the value of the company after all the debts have been repaid. The more equity a firm has, the more valued it will be.<\/p>\n\n\n\n<p>Equity is essential for a company because:<br><br>1. <strong>Indicates financial health<\/strong><br><br>Equity represents the net value of a company and helps in determining its financial health.<br><br>2. <strong>Assists in business expansion<\/strong><br><br>Through equity financing, <a href=\"https:\/\/www.experlu.co.uk\/blog\/accountant-can-help-a-small-business\/\">business owners<\/a> can sell their stock shares to investors. This helps the company in the <a href=\"https:\/\/www.experlu.co.uk\/blog\/a-step-by-step-guide-to-starting-a-new-online-business\/\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-purple-color\">funding of business<\/mark><\/a> expansion without bearing any financial burden.<br><br>3. <strong>Securing an equity investor<\/strong><br><br>Investors are selective about which project to invest in. They are likely to invest in a company having high equity and lower debt.<br><br>4. <strong>Equity can be used by<\/strong><\/p>\n\n\n\n<p>\u2022  Investors to determine whether a significant quantity of equity has accumulated to demand dividends.<br>\u2022  Lenders do check whether the business has enough funds to pay its debt.<br>\u2022  Supplier to determine whether they can extend credit depending upon the business equity.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"What_is_the\">How to calculate total equity?<\/h2>\n\n\n\n<p><strong>Total Equity Formula<\/strong>: The formula to calculate total equity and how do you find equity is:<\/p>\n\n\n\n<p class=\"has-text-align-center has-pale-cyan-blue-color has-vivid-purple-background-color has-text-color has-background\">                                       <span class=\"has-inline-color has-white-color\"><strong> Total equity = Total assets &#8211; Total liabilities<\/strong><\/span><\/p>\n\n\n\n<p>The alternative method of calculating total equity formula is:<\/p>\n\n\n\n<p class=\"has-text-align-center has-white-color has-vivid-purple-background-color has-text-color has-background\"><strong>Total equity = Common stock + Preferred stock + Additional paid-in capital + Retained earnings &#8211; Treasury stock<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"What_are_the\">What are the steps of calculating equity?<\/h3>\n\n\n\n<p><strong>1.  Calculating total assets<\/strong><\/p>\n\n\n\n<p class=\"has-text-align-center has-white-color has-vivid-purple-background-color has-text-color has-background\">                                        <strong>Total assets = Current assets + Non-current assets<\/strong><\/p>\n\n\n\n<p>Current assets are the assets that are realised within an <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-black-color\">accounting period<\/mark>.<\/p>\n\n\n\n<p>These include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Cash and cash equivalents<\/li>\n\n\n\n<li>Prepaid expenses<\/li>\n\n\n\n<li>Accounts receivable<\/li>\n\n\n\n<li>Short term <a href=\"https:\/\/www.experlu.co.uk\/blog\/top-10-investments-to-make-money\/\" data-wpil-monitor-id=\"16\">investments<\/a><\/li>\n\n\n\n<li>Inventory<\/li>\n<\/ul>\n\n\n\n<p>Non-current assets are the assets that are not expected to convert into cash within <a href=\"https:\/\/www.experlu.co.uk\/accountant\">an accounting<\/a> year.<\/p>\n\n\n\n<p>These include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Tangible fixed assets like land, building, machinery, equipment, furniture, and more.<\/li>\n\n\n\n<li>Intangible assets like <a href=\"https:\/\/www.experlu.co.uk\/blog\/register-a-trademark\/\" data-wpil-monitor-id=\"17\">patents<\/a>, trademarks, goodwill, and more.<\/li>\n\n\n\n<li>Investments in other subsidiaries and associates<\/li>\n\n\n\n<li>Investment <a href=\"https:\/\/www.experlu.co.uk\/blog\/how-to-avoid-capital-gains-tax-on-buy-to-let-property\/\" data-wpil-monitor-id=\"18\">properties<\/a><\/li>\n<\/ul>\n\n\n\n<p>2. <strong>Calculating total liabilities<\/strong><\/p>\n\n\n\n<p class=\"has-text-align-center has-white-color has-vivid-purple-background-color has-text-color has-background\">                                       <strong>Total liabilities = Current liabilities + Non-current liabilities<\/strong><\/p>\n\n\n\n<p>Current liabilities are the short-term financial obligations that the business must pay within one year.<\/p>\n\n\n\n<p>These include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-black-color\">Accounts payable<\/mark><\/li>\n\n\n\n<li>Accrued or outstanding expenses<\/li>\n\n\n\n<li>Employee wages and <a href=\"https:\/\/www.experlu.co.uk\/blog\/accountants-make-payroll-part-of-your-service\/\" data-wpil-monitor-id=\"19\">payroll<\/a> liabilities<\/li>\n\n\n\n<li>Taxes<\/li>\n\n\n\n<li>Bank overdraft<\/li>\n\n\n\n<li>Short term <a href=\"https:\/\/www.experlu.co.uk\/blog\/small-business-start-up-grants-and-loans\/\" data-wpil-monitor-id=\"20\">loans<\/a><\/li>\n<\/ul>\n\n\n\n<p>Non-current liabilities are the long term financial obligations due beyond one accounting period.<\/p>\n\n\n\n<p>These include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-black-color\">Long term loans<\/mark><\/li>\n\n\n\n<li>Deferred compensation<\/li>\n\n\n\n<li>Capital leases<\/li>\n\n\n\n<li>Pension obligations<\/li>\n<\/ul>\n\n\n\n<p>3. <strong>Calculating equity<\/strong><br><br>Total liabilities are subtracted from the total assets to determine the company&#8217;s equity.<\/p>\n\n\n\n<p>There is an alternative approach to calculating a company&#8217;s equity.<\/p>\n\n\n\n<p class=\"has-text-align-center has-white-color has-vivid-purple-background-color has-text-color has-background\"><strong>Total equity = Common stock + Preferred stock + Additional paid-in capital + Retained earnings &#8211; Treasury stock<\/strong><\/p>\n\n\n\n<p>All the line items under shareholders&#8217; equity from the balance sheet are calculated. Then, these items, including common stock, preferred stock, additional paid-in capital and retained earnings, are added. Treasury stock has to be subtracted from the sum obtained to get total equity.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"What_is_positive\"><a><\/a>What is positive and negative equity?<\/h3>\n\n\n\n<p>Equity can be either positive or negative.<\/p>\n\n\n\n<p>Positive equity means assets that exceed liabilities. It implies that the company has a surplus after paying all its debts.<\/p>\n\n\n\n<p>On the other hand, negative equity is a red flag. Startups often have negative equity in the first few years.<\/p>\n\n\n\n<p>A company will have negative equity when its total liabilities exceed its total assets. This implies a situation of potential financial distress for the company.<\/p>\n\n\n\n<p><br>Some of the reasons for negative shareholders equity are:<\/p>\n\n\n\n<p>1. <strong>Pre-revenue<\/strong><br><br>Often <a data-wpil-monitor-id=\"21\" href=\"https:\/\/www.experlu.co.uk\/blog\/startup-funding-stages-different-stages-of-funding-for-startups-explained\/\">startups<\/a> are pre-revenue, meaning negative equity.<\/p>\n\n\n\n<p>2. <strong>Over leverage<\/strong><br><br>Borrowing a considerable amount of money to cover the losses can make the company over-leveraged. This big pile-up of debt will appear as a liability in the company&#8217;s balance sheet and result in negative shareholders&#8217; equity.<\/p>\n\n\n\n<p>3. <strong>Accumulation of losses<\/strong><br><br>Accumulation of losses over the years results in a negative balance of the shareholders&#8217; equity. This is because the net accumulated losses are deducted from the retained earnings.<\/p>\n\n\n\n<p>4. <strong>Payments of dividend<\/strong><br><br>Paying dividend that exceeds the company&#8217;s profits or retained earnings can negatively affect shareholders&#8217; equity. Large dividend payments combined with financial losses in the successive periods will also show a negative balance of the shareholders&#8217; equity.<\/p>\n\n\n\n<p>5. <strong>Repurchase of treasury stock<\/strong><br><br>If a company decides to repurchase its common stock, it leads to equity depletion. Repurchasing a substantial number of shares of common stock can lead to negative shareholders equity.<\/p>\n\n\n\n<p><br><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Equity is an important financial term with varying meanings. Often when someone says equity, they mean either owner&#8217;s equity\/ shareholder&#8217;s equity. It represents the net worth or book value of a company or a business. This blog post is divided into the following sections: Table of Content What is equity? Why is equity important? What [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":1332,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8],"tags":[54,9,89,68],"class_list":["post-1324","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","tag-accounting","tag-business","tag-equity","tag-finance"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What is equity, and how do you calculate it? - Experlu<\/title>\n<meta name=\"description\" content=\"Equity is an important financial term with varying meanings. 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