Equity is the part of a company that belongs to the shareholders. It is the difference between what a company owns and what it owes in debt. In other words, it is what remains if all debts were to be repaid.
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Equity shows how much of the company is financed with money from the owners.
A company is financed with equity and debt. Equity consists of the capital contributed by shareholders and the profits that have been retained within the company. The larger the equity compared to the debt, the more financially stable a company is often considered to be. If a company makes a loss, equity decreases. If it makes a profit and does not distribute it fully, equity increases.
Short example:
Suppose a company has €5,000,000 in assets, such as buildings, machinery and cash at the bank. It has €2,000,000 in debt.
The equity is then €5,000,000 minus €2,000,000 = €3,000,000. This amount represents the owners’ share in the company.
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