EQUITY (COMPANY LAW)
Equity is the value of a company that is attributable to shareholders' investment in it after subtracting all liabilities from its assets. It represents the residual interest in the assets of an entity after deducting all its liabilities.
Shareholder equity can be either negative or positive. If positive, the company has enough assets to cover its liabilities. If negative, the company's liabilities exceed its assets; if prolonged, this is considered balance sheet insolvency. Equity can be negative if total liabilities exceed total assets. Equity, as a term for ownership, contrasts with debt, which is borrowed funds.
Equities (or stocks) are issued by companies using stock certificates (certificates of ownership) and represented by two numbers: the price per share (or share price) and the total number of shares outstanding (share count).
The calculation of equity is a company's total assets minus its total liabilities, and it's used in several key financial ratios such as ROE (return on equity). Equity = Assets - Liabilities
When a company is formed it is funded by an infusion of cash from shareholders. These shareholders are entitled to the “residual” or remaining value should the company be dissolved or liquidated. Equity can be viewed as a measure of a company's financial health. The greater the equity value, the healthier the company is, and vice versa.
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