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DEFINITION:
Equity is the portion of a company or other asset owned by investors and is calculated by subtracting all outstanding liabilities from the total value.
Understanding equity
Equity is the portion of a business or other asset that belongs to the owners. It is calculated by taking the total value of the asset and subtracting from it all outstanding liabilities such as bills and taxes. It is found on the balance sheets of most companies and is used to determine their health. Equity can be divided among several owners, just as large companies often have many shareholders.
EXAMPLE
In its financial report for the second quarter of 2019, Tesla reported its equity at about $5.7 billion. To calculate that figure, the company would take the value of its assets, about $31.8 billion, and subtract its liabilities, about $24.7 billion. Because Tesla is also the majority owner of some subsidiaries, some of which have minority owners, the company must subtract out the minority owners’ shares, about $1.4 billion, before calculating equity. Consequently, Tesla’s equity equals $31.8 billion – $24.7 billion – $1.4 billion. That’s about $5.7 billion, which is the value reported on the balance sheet. That’s how much money would be paid out to shareholders if Tesla were liquidated overnight. Source: Tesla Q2 Report
Takeaway
Equity is like a pie that you bought with a friend…
None of you owns the entire pie, and each of you is entitled to eat only a portion of the pie equal to the percentage of the pie for which you paid. Similarly, ownership of a business or other asset is based on the percentage that a person paid for. Subtracting the liabilities of the business from its assets and then multiplying by the percentage of the person who owns the business gives the dollar value of equity.