Stockholders equity, also known as shareholders equity, is the amount of assets remaining in a business after all liabilities have been settled. It represents the residual value of assets minus liabilities. It is calculated either as a firms total assets less its total liabilities or alternatively as the sum of share capital and retained earnings less treasury shares. Shareholders equity might include common stock, paid-in capital, retained earnings, and treasury stock.
Conceptually, stockholders equity is useful as a means of judging the funds retained within a business. If this figure is negative, it may indicate an oncoming bankruptcy for that business, particularly if there exists a large debt liability as well. In events of liquidation, equity holders are last in line behind debt holders to receive any payments. This means that bondholders are paid before equity holders. Therefore, debt holders are not very interested in the value of equity beyond the general amount of equity to determine overall solvency. Shareholders, however, are concerned with both liabilities and equity accounts because stockholders equity can only be paid after bondholders have been paid.
The trend in stockholders equity can be assessed by looking at past balance sheet reports. Companies with positive trending shareholder equity tend to be in good fiscal health. Those with negative trending shareholders equity could be in financial trouble, especially if they carry significant debt. A negative stockholders equity balance, especially when combined with a large debt liability, is a strong indicator of financial distress.
