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Shareholder's Equity is a financial metric that represents the residual interest in a company's assets after deducting its liabilities. In other words, it's the amount of money that would be left over for shareholders if a company were to liquidate all its assets and pay off all its debts. In this article, we'll guide you through the process of calculating Shareholder's Equity and why it’s important.
The formula for calculating Shareholder's Equity is:
Shareholder's Equity = Total Assets - Total Liabilities
Consider a real-world example of a publicly traded company, such as Apple Inc. We'll use the following data from their 2021 Annual Report to calculate the Shareholder's Equity:
Total Assets: $365,725 million
Total Liabilities: $258,549 million
We’ll calculate the Shareholder's Equity using the formula:
Shareholder's Equity = Total Assets - Total Liabilities
Shareholder's Equity = $365,725 million - $258,549 million
Shareholder's Equity = $107,176 million
In this example, Apple Inc.'s Shareholder's Equity is $107,176 million, which means that after paying off all its liabilities, the company would have $107,176 million left over for its shareholders.
Understanding Shareholder's Equity is essential for several reasons, which can be summarized in the following three core points:
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