Accounting

Image source: www.seniorliving.org.

Shareholders' equity -- also referred to as owners' equity or simply "equity" -- is an important number for investors, as it shows a company's net worth. That is, the equity lets investors know how much they would (theoretically) receive if the company shut down its business, sold its assets, and paid off its debts. So can this number be found on a company's income statement?

The short answer
Simply put, equity is nowhere to be found on the income statement. Companies release three main financial statements, and each one has its specific purpose.

  • Income statement: As the name implies, the income statement shows the calculations for several different income numbers (gross income, interest income, net income, etc.), and also shows information such as dividends and earnings per share.
  • Balance sheet: This is where you'll find shareholders' equity. A balance sheet shows the economic principle that a company's assets are equal to its liabilities plus its shareholders' equity.
  • Cash flow statement: This shows the flow of money into and out of the company, and shows the change in the company's cash from one time period to the next.

Although equity is not directly listed on the income statement, the information listed on the income statement does have a significant impact on equity. Specifically, whatever net income a company generates that doesn't get paid out as dividends serves to increase equity. On the contrary, if a company's net income is negative, it can reduce the equity in the business.

Where to find equity, and what you're looking at
As I mentioned, you can find equity on the balance sheet, usually toward the bottom. Just to give you an idea of what to look for, here's the equity portion of Wal-Mart's 2015 balance sheet.

Wmt Equity

Image source: Wal-Mart.

As you can see, there are several components to equity. This includes:

  • Par value of company stock.
  • Paid-in capital (when shares were originally purchased from the company).
  • Retained earnings -- that is, the money the company made throughout its history that wasn't paid out as dividends.

Some companies may also list paid-in capital from preferred stock (if applicable), as well as stock held in the company's treasury, which is subtracted from the shareholders' equity.

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