On a company's balance sheet, "stockholders' equity," also called "shareholders' equity," is a measure of that business' true value. If the company were to liquidate by selling off all its assets and paying off all its debts, whatever is left over would be the stockholders' equity – the amount the company could distribute to its shareholders. Stockholders' equity rises and falls according to other entries on the balance sheet. Take a look at some decrease in stockholders' equity examples to understand types of changes.
How Stockholders' Equity Works
Stockholders' equity isn't an independent value; that is, you don't look at a company's finances and "add up" the equity. Rather, stockholders' equity derives from other values on the balance sheet. The classic accounting equation is assets minus liabilities equals stockholders' equity.
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Stockholders' equity is not the same thing as a company's "market capitalization," which tells you the total value of a company's outstanding stock. Stock values are influenced by countless factors, from a company's financial performance to investors' gut feelings. Stockholders' equity, by contrast, reflects only what's in the company's books. In fact, stockholders' equity also goes by the name "book value."
Consider also: The Difference Between Shareholders' Equity and Net Worth
Reduced Total Assets
Since stockholders' equity represents the value of the company's assets minus any liabilities, it naturally follows that if the company's assets decrease, its book value will decrease, too. For example, say a company owns a truck, which is an asset. Like all vehicles, that truck will depreciate – lose value over time.
As it does, the company's total assets decline in value, and stockholders' equity is decreased by this incident too. Similarly, if the assets of Company A include shares of stock in Company B, and that second company's share price falls, that will reduce the book value of Company A.
Increased Company Liabilities
Following the same formula, if there's an increase in the company's liabilities, then stockholders' equity is decreased by that change as well. Say a company loses a lawsuit and must pay damages. The judgment becomes a liability. The bigger the judgment, the bigger the liability, and the bigger the drop in stockholders' equity.
Or if the company hires more people, their wages and benefits are liabilities, and those will reduce stockholders' equity too. Anything that adds liability decreases equity.
Consider also: What Affects Stockholders' Equity?
Stockholders' equity also equals paid-in capital plus retained earnings minus treasury shares. This equation should produce the same value as the assets/liabilities equation.
Paid-in capital is money the company received from selling shares of stock. Retained earnings is the portion of the company's profits that the company held onto rather than distributed to shareholders as dividends. For companies that have been in business a long time, retained earnings will usually be much larger than paid-in capital.
Treasury shares are shares of stock that the company has bought back from the public. Companies commonly buy back their shares to try to boost their stock price or reduce their exposure to takeover attempts. When a company buys back its shares, it gives back some of its paid-in capital to the public. So when a company increases its treasury shares, its book value will decrease.