Equity explained

the value of an asset once debt has been subtracted

                                

What does equity mean?

Equity is the value of an asset once liabilities such as debt have been subtracted. A common term in finance, equity can also apply to other assets.

For example, let’s imagine that Imogen has a $20,000 car. She bought it using a loan, and still has $7,000 of repayments left to make. By subtracting the debt from the value of the vehicle, we can see that she has equity of $13,000.

In terms of property, it works a little differently. Let’s say William buys a $500,000 home with a $50,000 deposit, leaving him with a mortgage of $450,000. This would mean he has equity of $50,000. If the property suddenly soared in value, and was worth $800,000, he would have equity of $350,000.

Equity in finance

Now that we’ve covered examples of equity in everyday life, let’s delve into what it means in a financial setting.

This term normally refers to shareholder equity. Just like with cars and property, companies use this to illustrate the difference between their total assets and their total liabilities. A strong, positive figure indicates that the firm is in good financial health – and as a result, this metric is often relied upon by analysts.

For the shareholders, this figure illustrates how much they would receive if a corporation liquidated everything and paid off their debts. It helps investors deduce how risky stock might be, and whether a business is stable.

Equity is important for investors because it can entitle them to dividends – a share of a company’s profits – on a regular basis. In other cases, they may receive voting rights, allowing them to have a say on the future direction of the business.

Negative shareholder equity suggests to an investor that a company amounts to a high-risk investment. This is because the liabilities (or debts) that the firm has racked up outweigh the total value of its assets.

For investors, shareholder equity is one of several metrics used when assessing a company or a business opportunity. Relying on this measurement alone does not always provide a full picture of an organization’s financial affairs.

The material provided on this website is for information purposes only and should not be regarded as investment research or investment advice. Any opinion that may be provided on this page is a subjective point of view of the author and does not constitute a recommendation by Currency Com Bel LLC or its partners. We do not make any endorsements or warranty on the accuracy or completeness of the information that is provided on this page. By relying on the information on this page, you acknowledge that you are acting knowingly and independently and that you accept all the risks involved.
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