What is a company's shareholders' equity?

Every company needs to know the resources it has available for its own organization. In other words, to make the soundest financial decisions. It must also provide this information when carrying out certain financial transactions with third parties.

That is why we are going to talk to you about shareholders' equity (fondos propios), a concept used to determine a company's resources. It also provides important information on the company's balance sheet.

Shareholders' equity consists of the financial resources that come from the contributions made to the company by its owners (partners or shareholders) and from the profits generated in the course of its business.

In other words, it is made up of everything that belongs to the company's owners.

What is it for?

A company's shareholders' equity is an indicator of its financial health, since it represents the residual value of its assets once all its obligations or debts have been deducted.

Shareholders' equity reflects the company's capacity to self-finance, which is essential when managing its growth and long-term continuity.

It also reflects the company's solvency, which is often measured by calculating the solvency ratio.

In addition, a company's shareholders' equity plays a very important role in attracting investors, because it is a measure of commitment that demonstrates the confidence the owners have in their own company.

How a company's shareholders' equity is calculated

Shareholders' equity is used to determine the company's position and its solvency. It is important to monitor how shareholders' equity evolves over time, comparing its value at the beginning of the financial year with its current value and its value at the end of the financial year.

Let us look at the formula that gives us the key to calculating a company's shareholders' equity:

Shareholders' equity = Assets – Liabilities (pasivo exigible).

Components of a company's shareholders' equity

A company's shareholders' equity is made up of:

– The initial capital contributed by the company's shareholders.

– Any capital increases that have been carried out.

– Reserves arising from profits obtained in prior financial years, whether legal or voluntary.

– Capital consisting of outstanding unpaid contributions.

– Share premiums on the issue of shares (participaciones).

– Shares and equity interests in the company's equity.

– Other contributions made by the shareholders.

– The profit or loss for the current financial year.

– Valuation adjustments.

Difference between shareholders' equity and net equity

When discussing these financial terms, it is easy to confuse a company's shareholders' equity with its net equity (patrimonio neto).

However, even though they may seem to be the same, it is worth distinguishing between them.

As we have seen, shareholders' equity is made up of the shareholders' contributions, reserves, and valuation adjustments.

By contrast, net equity is a broader concept since, in addition to shareholders' equity, it also includes other items such as grants and donations.

The difference between the two is that, although all of these items are considered non-payable liabilities (pasivo no exigible)—that is, liabilities that carry no obligation to be repaid—the contributions come from different economic actors.

Thus, shareholders' equity is generated within the company, while the rest of net equity comes from third parties.

Shareholders' equity accounts

Under the Spanish General Chart of Accounts (Plan General Contable), the shareholders' equity accounts are as follows:

– Capital: Registered capital. 100, 101, 102 / (Uncalled capital). (1030), (1040)

– Share premium. 110

– Reserves: Legal and statutory reserves. 112, 1141 / Other reserves. 113,1140,1142,1143,1144,115,119

– (Treasury shares and equity interests). (108), (109)

– Prior years' results: Retained earnings carried forward (remanente). 120 / (Prior years' losses). -121

– Other shareholder contributions. 118

– Profit or loss for the year. 129

– (Interim dividend). -557

– Other equity instruments. 111