Average Shareholders’ Equity
Average shareholders’ equity is a financial metric used to calculate the average equity value held by a company’s shareholders over a specific period of time, usually a fiscal year. It is often used in financial ratios, such as return on equity (ROE), to assess a company’s performance and profitability.
To calculate average shareholders’ equity, you need to find the shareholders’ equity value at the beginning and end of the period, and then calculate the average of these two values.
Formula:
\(\text{Average Shareholders’ Equity} = \frac{\text{Beginning Shareholders’ Equity + Ending Shareholders’ Equity}}{2} \)
Shareholders’ equity is the residual interest in the company’s assets after deducting its liabilities. It can be found on the company’s balance sheet and typically includes common stock, preferred stock, paid-in capital, and retained earnings.
Example of Average Shareholders’ Equity
Let’s take a look at a fictional company called Tech Innovators Inc. and use its financial data to calculate the average shareholders’ equity.
Tech Innovators Inc. financial data for the fiscal year:
- Beginning Shareholders’ Equity:
- Common stock: $500,000
- Preferred stock: $200,000
- Paid-in capital: $100,000
- Retained earnings: $300,000
- Ending Shareholders’ Equity:
- Common stock: $550,000
- Preferred stock: $220,000
- Paid-in capital: $120,000
- Retained earnings: $410,000
First, we need to find the total shareholders’ equity at the beginning and end of the period.
Beginning Shareholders’ Equity = Common stock + Preferred stock + Paid-in capital + Retained earnings
Beginning Shareholders’ Equity = $500,000 + $200,000 + $100,000 + $300,000 = $1,100,000
Ending Shareholders’ Equity = Common stock + Preferred stock + Paid-in capital + Retained earnings
Ending Shareholders’ Equity = $550,000 + $220,000 + $120,000 + $410,000 = $1,300,000
Now, we can calculate the average shareholders’ equity for the period:
\(\text{Average Shareholders’ Equity} = \frac{\text{Beginning Shareholders’ Equity + Ending Shareholders’ Equity}}{2} \)
\(\text{Average Shareholders’ Equity} = \frac{1,100,000 + 1,300,000}{2} = \frac{2,400,000}{2} = 1,200,000 \)
So, the average shareholders’ equity for Tech Innovators Inc. during the fiscal year is $1,200,000.
