Shareholder Equity (SE) is a key concept in understanding the financial health of a business. It is calculated by subtracting a company’s total liabilities from its total assets (also called net assets). Simply put, shareholder equity is what remains when a company’s liabilities have been paid off. From a shareholder’s perspective, equity represents the share of company assets attributable to the shareholder’s investment.

When a company’s assets are more than its liabilities, it means that the company is in good financial shape and its shareholders are likely to benefit from the positive balance between assets and liabilities. Conversely, if liabilities exceed assets, the company goes into a negative net worth situation, which can be a sign of deeper financial problems. A substantial shareholder balance can also give a company confidence in its ability to attract investors and secure debt financing.

It is important to note that retained earnings (RE) are an essential component of shareholder equity. Retained earnings represent the percentage of net earnings that a company retains, rather than distributing to shareholders as dividends. In other words, retained earnings are profits a company reinvested as opposed to distributing them to shareholders as dividends. When a company reinvests, retained earnings become part of shareholder equity, thus increasing the company’s overall financial strength.

Shareholder equity is an important measure of a company’s financial health. It can give analysts and investors a clear picture of the company’s financial situation and its ability to generate profits. Businesses that have a positive net worth can feel confident in their financial capabilities and can attract additional investors and creditors—increasing their overall financial health.