Stockholders' equity is the residual amount of funds in a business that theoretically belong to the owners of the entity. The amount of stockholders' equity can be calculated in a number of ways, which include the following:
- The simplest approach is to look for the stockholders' equity subtotal in the bottom half of a company's balance sheet; this document already aggregates the required information.
- If a balance sheet is not available, summarize the total amount of all assets and subtract the total amount of all liabilities. The net result of this simple formula is stockholders' equity.
- If the preceding options are not available, it will be necessary to compile the amount from individual accounts in a company's general ledger. If so, the stockholders' equity formula is:
There is no such formula for a nonprofit entity, since it has no shareholders. Instead, the equivalent classification in the balance sheet of a nonprofit is called "net assets."
The amount of stockholders' equity is really more of a theoretical concept, for it does not accurately reflect the amount of funds that would be distributed to shareholders if a business were to be liquidated. The following valuation issues should also be considered:
- Intangibles. There may be a number of valuable intangible assets, such as brands, that are not recognized in a company's financial statements.
- Market value. The recorded amounts of certain assets are not adjusted to reflect increases in their market value, such as fixed assets.
- Future events. The sale price of a business will incorporate the expectations of the buyer and seller regarding future events, such as a decline in industry activity, or the reverse. These changes do not appear in the balance sheet.
In short, there are several ways to calculate stockholders' equity (all of which yield the same result), but the outcome may not be of particular value to the shareholder.