A company can finance its business using either debt or equity. Debt needs to be paid back, while equity does not. The total equity on a company’s balance sheet shows the book value, or historical value, of the owners’ stake in a company if all debts were paid off. Total equity equals total assets minus total liabilities and consists of the amount of money investors have invested in the company and the earnings a company has accumulated from its operations. A company with a larger portion of equity compared to liabilities typically has a lower risk of bankruptcy because of its lower debt burden.
Step 1
Determine the amount of a company’s total assets on its balance sheet. For this example, use $1 million in total assets.
Step 2
Determine the amount of a company’s total liabilities on its balance sheet. For this example, use $300,000 in total liabilities.
Step 3
Subtract the company’s total liabilities from its total assets to determine its total equity. In the example, subtract $300,000 from $1 million. This equals $700,000, which is the company’s total equity.
Tip
You can monitor a company’s total equity over time to make sure it’s not getting too small compared to debt.