Equity

Shareholders' equity is what remains of a company's assets after subtracting its debts. It comprises the money shareholders put in and the profits retained over the years. Also called net assets, it is the part the company genuinely owns.

For an individual, it is the value of a home minus the mortgage. A 500,000 house with a 300,000 loan leaves 200,000 of equity. Companies are measured the same way.

Thick equity provides resilience. Even if revenue falls, a company with little debt can absorb the blow. Thin equity paired with heavy borrowing means small shocks can destabilise the business.

Equity is the raw material for several ratios. Net profit divided by equity gives ROE; debt divided by equity gives the debt ratio. You need this figure to read stability and profitability together. Large equity is not automatically better, though. Capital sitting idle drags ROE down. Stability and efficiency pull against each other, so the real judgement lies in the balance between them.