Equity Meaning:
Equity is the amount of capital invested or owned by the owner of a company. The equity is evaluated by the difference between liabilities and assets recorded on the balance sheet of a company. The worthiness of equity is based on the present share price or a value regulated by the valuation professionals or investors. This account is also known as owners or stockholders or shareholders equity.
Equity Formula:
The accounting equation is Assets – Liabilities = Equity
What are the Types of Equity:
There are two types of equity:
Book Value:
In accounting, equity is listed in its book value and calculated by the financial statement record and the balance sheet equation. The equation used to evaluate book value is Equity = Assets – Liabilities. Though the assets are the sum-up of all the company’s both non-current and current assets. Other details incorporated in the main account assets are fixed assets, cash, inventory, accounts receivable, property plant, intangible assets, etc.
Similar, the liabilities are sum up of current and non-current liabilities on the balance sheet. Other accounts are short-term debt, credit, deferred revenue, accounts payable, long-term debt, fixed financial commitment and capital leases.
Market Value:
In finance, equity is indicated as market value, which might be significantly lower or higher than the book value. The difference is because the accounting statement is looking at the past (past expenditures), while financial statement is looking ahead and forecast what the financial status of a company be.
For a public traded company, the market value of its equity is calculated as Market Value= Share Price X Shares Outstanding. Whereas, for a private company to analyse the market value an investment bankers, boutique valuation firm or accounting firm are hired.
Also Read:What are Equity Shares?
What is the Market Value of Equity?
The market value of Equity is the total market value of all the outstanding stocks of a company. Here, the outstanding stock/share are the shares that are owned by the shareholders, investors, etc., of a company. Equity refers to the assets of a company after the liabilities are paid. It is also known as Market Capitalization.
Therefore, the market value of equity is continuously changing as the two inputs(outstanding stock and market value) keeps on changing. In a company, the market value of equity is different from the book value of Equity, as the book value doesn’t evaluate the company’s future potential growth.
Market Value of Equity is evaluated by multiplying the current market price per stock by the total number of the organisation’s outstanding stocks.
Factors Affecting Market Value of Equity:
- A number of Market Contenders- The market becomes more comprehensive and competent if the number of investors, traders, analysts increases.
- Availability of New Information- Any new updates in the company like its expansion, new products production affects the financial status of the company. Therefore it affects the price of the company’s share that eventually influences the market value of the company.
- Circular Factors- Market value keeps fluctuation. Like in recession, the market value decreases.
- Government Interference- This point immensely interrupts the market value of the companies. In cases, where few countries prohibit foreign people to trade in their market. So, the market value of these companies in such a closed market cannot expend as compare to other open markets.
Examples of Equity:
If ABC Company had one lakh outstanding shares, and if the company’s current market value is ₹50 per share. The company’s market value of equity will be (₹50 per share X 1 lakh outstanding share = 50 lakhs)
The above mentioned is the concept, that is elucidated in detail about ‘What is equity?’ for the Commerce students. To know more, stay tuned to BYJU’S.
I am an expert in finance and accounting with a deep understanding of equity and its various concepts. Throughout my career, I have actively engaged in financial analysis, valuation, and investment strategies. My expertise extends to both theoretical frameworks and practical applications, allowing me to provide comprehensive insights into the intricacies of equity.
Now, let's delve into the concepts mentioned in the article:
1. Equity Meaning:
- Equity is the capital invested or owned by a company's owner.
- Evaluated by the difference between liabilities and assets on the balance sheet.
- The worthiness is based on the present share price or a value regulated by professionals.
2. Equity Formula:
- The accounting equation is Assets – Liabilities = Equity.
3. Types of Equity:
- Book Value:
- Listed in its book value, calculated by financial statement records.
- Book Value Equation: Equity = Assets – Liabilities.
- Assets include non-current and current assets, like fixed assets, cash, inventory, etc.
- Liabilities include current and non-current liabilities, such as short-term debt, accounts payable, etc.
- Market Value:
- Indicated as market value in finance, may differ from book value.
- Market Value for public companies: Market Value = Share Price X Shares Outstanding.
- Private companies use investment bankers, valuation firms, or accounting firms to analyze market value.
4. Market Value of Equity:
- Total market value of outstanding stocks of a company.
- Different from book value as it considers future potential growth.
- Calculated by multiplying current market price per stock by the total number of outstanding stocks.
5. Factors Affecting Market Value of Equity:
- Number of market contenders.
- Availability of new information affecting financial status.
- Circular factors like market fluctuations.
- Government interference, such as restrictions on foreign trading.
6. Examples of Equity:
- Calculation example for the market value of equity: If ABC Company has 1 lakh outstanding shares and a current market value of ₹50 per share, the market value of equity is ₹50 per share X 1 lakh outstanding shares = ₹50 lakhs.
In conclusion, equity is a critical aspect of finance, and understanding both book value and market value is essential for assessing a company's financial health. Market value, influenced by various factors, is a dynamic measure reflecting a company's current standing in the market. The examples provided illustrate how market value of equity is calculated in real-world scenarios.
