Shareholders' Equity

From Financial Literacy Wiki

In accounting, the shareholders' equity is the owners' interest in the assets of the enterprise after deducting all its liabilities. It appears on the Balance Sheet of the business' financial statements and is equal to Assets less Liabilities (Debt and other amounts owed)

The Book Value of equity will increase if the firm's assets increase more than its liabilities, for example. A firm making profits for example, receives more cash for its products than the cost at which it produced these goods, and so in the act of making a profit it is increasing its assets. Also, an issuance of new equity in which the firm obtains new capital increases the total shareholder's equity.

Equity will decrease, for example, when machinery depreciates, which is registered as a decline in the value of the asset, and on the liabilities side of the firm's balance sheet as a decrease in shareholder's equity.

Share Repurchases

Another event that changes the shareholder's equity is an equity repurchase, in which a firm gives back money to its investors, reducing on the asset side its financial assets, and on the liability side the shareholder's equity. For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment, as both consist of the firm giving money back to investors. Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares (increases the size of each share) in future income and distributions.

The individual investor is interested not only in the total changes to equity, but to the increase/decrease in the value of his own personal share of the equity. This reconciliation of equity should be done both in total and on a 'per share' basis.