finance
Equity
What's left for owners after subtracting liabilities from assets. The owner's stake in the business.
Definition
Equity is the owner's residual claim on the business: Assets minus Liabilities. If you sold every asset and paid off every debt, equity is what would be left for owners. It's the bottom of the balance sheet equation. Equity grows from two sources: retained profits (net income left in the business) and capital contributions (owners putting cash in). It shrinks from losses and owner distributions. For most service businesses, equity is the long-term measure of wealth creation - far more meaningful than this year's profit.
In your business
- →Track equity growth year over year - it's the truest measure of wealth creation
- →Avoid distributing all profit - retained earnings fund growth without needing outside capital
- →When considering investment, calculate the implied equity stake before agreeing terms