# Company Equity

## What is company equity?

In business, equity is the value of an ownership interest in a company, which represents the residual interest in the company’s assets after deducting all liabilities. Equity is often synonymous with ownership or stake. When you buy shares in a company, you’re buying a piece of that company and becoming an owner (or part-owner) of it. The total value of the shares outstanding is said to represent the company’s equity.

Calculating equity is quite simple. For calculating equity in a business, you need to subtract the total liabilities from the total assets. This provides the company’s net worth (or shareholders’ equity).

Several factors can influence the equity of a company. Some of the most important include:

• Earnings. The higher the earnings, the more valuable the company’s equity becomes. This means the company is making more money and is likely to pay more significant dividends in the future.
• Market conditions. Overall market conditions can significantly impact a company’s stock price (and thus, its equity). If there’s a lot of volatility in the market, for example, or it’s in a downturn, it will likely impact the company’s stock price.
• Control or ownership. The more control or ownership someone has in a company, the more valuable their equity stake becomes. This is because they stand to gain more if the company does well financially.

Many other factors can influence a company’s equity, but these are some of the most important. As you can see, equity can be complex and affected by various factors.

## Company equity case study

Imagine you own a company with the following balance sheet:

Assets: \$100,000

Liabilities: \$60,000

In this case, your equity is equal to the total assets (\$100,000) minus the total liabilities (\$60,000). This means the company has a net worth of \$40,000. Your equity can be further broken down into two parts: invested capital and retained earnings. Invested capital consists of the original money invested in the company, while retained earnings are reinvested in the company.

## The bottom line

Equity can pertain to both business and homeownership, but the two are somewhat different. Business equity is the total value of a company’s assets minus its liabilities, while homeowners’ equity is the market value of a homeowner’s interest in their home. Several factors affect company equity, including earnings, dividends, and market conditions. It’s essential to understand equity before investing in any company.

Scroll to Top