To better understand equity. Let's have a look at a much simplified balance sheet of an example company.

A balance sheet is one of the core financial statements that businesses use to monitor their financial health. It provides a snapshot of a company's financial condition at a specific point in time. Typically at the end of a fiscal quarter or the end of a year.

On the left hand side of the balance sheet, we find the company's assets. These are resources that the company owns with the expectation that they will provide future economic benefits to the company.

Looking at the assets, we can see what the capital the company has raised has been used for. Typical items we find on the asset side are cash, raw materials, real estate, and so on. The right hand side of the balance sheet shows the sources of capital. Where does this money that was needed to buy assets actually come from? Usually, we distinguish between liabilities and equity here. Liabilities are obligations the company has to other parties.

This includes, for example, accounts payable, pension liabilities, and of course debts.

To reduce complexity, let's assume that in our example case, liabilities consist solely of classic debt like bank loans, for example.

This means our example company has two sources of financing, debt and equity.

The mix of debt and equity that a company you uses to finance its operations and growth is generally referred to as the capital structure.

Let's assume that our company had 100 million worth of assets at the end of the year, an outstanding debt of 60 million. What would be the amount of equity? Of course, we could look into the financial statements to find the answer, but as we know, the balance sheet's definition is that the balance sheet must balance. We can also calculate, therefore, the amount of equity by rearranging the fundamental balance sheet equation, assets equals liabilities plus equity. This will give us a value of equity of 40 million, but how to interpret this number? What's its practical relevance? The 40 million, often referred to as shareholders, equity or owner's equity represents the residual or net value of the assets after deducting liabilities. In other words, if all the assets were liquidated and all of the liabilities paid off, the shareholder's equity would be what's left over for the shareholders. It's the amount that belongs to the owners as this value is calculated based on entries in the accounting ledger, which are also known as the company's books. The equity value is also known as the book value of the company.