6.19What is shareholders’ equity?
1What is it?
Shareholders’ equity (net worth) is what belongs to owners: assets minus liabilities. It includes money invested by shareholders plus retained earnings (profits kept over the years).
2Why does it exist?
It is the owners’ stake. Growing equity through retained profits means the company is building value.
3Calculation
Equity = Assets − Liabilities = Share capital + Reserves
- Assets ₹7,500 cr − liabilities ₹3,500 cr = ₹4,000 cr
Equity = ₹4,000 crore.
4Quick revision
- Equity = assets − liabilities.
- Includes retained profits.
- Basis for ROE and book value.
5Knowledge check
Q1. What are retained earnings?Show answer
Past profits kept in the business rather than paid as dividends.
Q2. Can equity be negative?Show answer
Yes, if liabilities exceed assets (a serious warning).
Q3. Which ratio uses equity as its denominator?Show answer
ROE (also D/E).