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Of the three main components that make up a company’s balance sheet, stockholders’ equity is the one which represents the assets that make up the value of the company if it were to go out of business today. From an accounting standpoint, it is represented as the company’s total assets minus its total liabilities. Stockholders’ equity is made up of money that has been invested in the company over time, plus any retained earnings it has accumulated. It may also be referred to as shareholders’ equity, or the book value of the company, and typically refers to the value of equity from common stock.
A corporation’s owners are its stockholders who have invested money to buy shares of the company’s stock. The value of the stockholders’ equity on the balance sheet of the company represents the amount of money that would be available to them if the company shut down and liquidated its assets immediately. This value may not necessarily be reflective of the market value of the company; the expectation that a company will grow and generate more revenue in the future often makes its stock more valuable than what investors originally paid for it. Those investing in a company for its growth potential may therefore be less likely to base decisions on the stockholders’ equity value than on market value and potential.
Accountants consider the total assets of a company to be made up mainly of two components: stockholders’ equity and liabilities. There are some other possible components as well, including the value of any preferred stock as well as intangible assets, including goodwill, though not all companies may have them. When these values, along with liabilities, are subtracted from the company’s total value, the remaining portion is considered stockholders’ equity.
The two primary sources of capital that make up stockholders’ equity are investments in the company and retained earnings. Investments may include money that was put into the company when it originally formed, plus additional funds that may have been invested over the life of the company. Any capital that has been donated to the company would also be included. Retained earnings is money that the company has generated from doing business over time. Factors such as the age of the company, its net income over the years, and how much it pays out in dividends determines if retained earnings or investments make up the majority of its stockholders’ equity.