Lesson 03 — Shareholders' Equity
Week 05 · Lesson 3 of 4 · Week 05 — Reading a Balance Sheet
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Equity = Assets − Liabilities. It's the residual value that belongs to shareholders. "Company ki saari property mein se karz nikal do, jo bacha woh sharehold...
What is equity?
Equity = Assets − Liabilities. It's the residual value that belongs to shareholders.
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"Company ki saari property mein se karz nikal do, jo bacha woh shareholders ka hai."
Components
Share Capital
Face value × number of shares issued. In India, face value is usually ₹1, ₹2, ₹5, or ₹10.
Reserves & Surplus
Accumulated profits retained in the business over the years:
- Securities Premium — extra amount collected when shares were issued above face value (e.g., IPO at ₹500 with face value ₹10 → premium = ₹490)
- Retained Earnings — profits not distributed as dividends
- General Reserve — discretionary allocation from profits
Other Equity
- Revaluation reserves, foreign currency translation reserves
Book Value Per Share
Book Value = Total Equity / Number of Shares
This tells you the accounting value of one share.
- If share trades at ₹500 and book value is ₹200, P/B ratio = 2.5×
- Low P/B (< 1) may indicate undervaluation OR poor business quality
What to look for
| Signal | Meaning |
|---|---|
| Equity growing steadily | Company retaining and reinvesting profits |
| Equity shrinking | Losses eating into reserves (dangerous) |
| Negative equity | Company owes more than it owns (avoid!) |
Key takeaway
Equity represents shareholder wealth in the business. Growing equity = compounding.