Shareholder Equity
Shareholder Equity, also called owner’s equity or shareholders’ funds or net worth, is calculated as Total Assets minus Total Liabilities. It helps to determine the financial health of the company and represents the book value of the company.
Shareholder equity can be negative, indicating that the liabilities of the company exceed the assets owned by the company. If this negative equity continues for a longer time, it can lead to balance sheet insolvency.
Shareholder’s Equity can also be computed as the sum of company’s share capital and retained earnings minus any value of treasury shares. Although it indicates the financial status of the company, only with the help of other ratios and metrics can an analyst completely determine the financial health of the company and not merely on an absolute number of the Shareholders’ Equity.
Let’s understand this concept better with the help of an example. Presented below is the extract of the standalone Balance Sheet of Take Solutions:
| (Amount in Rs. crore) | As of 31-3-18 | As of 31-3-2017 |
| Total Assets (a) | 777 | 534 |
| Total Current Liabilities (b) | 6 | 15 |
| Total Non-Current Liabilities (c) | 1 | 1 |
| Shareholder’s Equity (a) - (b) - (c) | 770 | 518 |
This indicates that the company Take Solutions has grown its shareholders’ equity in FY2018 by Rs. 252 crore and has improved the financial health. This increase can be on account of profits earned during the financial year of Rs. 15 crore and equity fund raising of 1.47 crore shares of Re. 1 each undertaken at a premium to book value.