Equity represents the value that would be returned to a company's owners or shareholders if all the company's assets were liquidated and all its debts were paid off. It's essentially the net worth of the business. The formula for calculating equity is as follows:
Equity = Assets – LiabilitiesÂ
Equity shows the true value that owners have in a business. For business owners and investors, equity is like a financial safety net—it represents their stake in the company and its growth potential.Â
Positive, increasing equity is a clear sign that the company is strengthening its value and maintaining a healthy financial position. If equity is shrinking, it might be a sign the business has overextended with debt or is finding it hard to grow assets—both possible signs of financial trouble.
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