Welcome to the Wealth Scribble Series, your treasure trove of bite sized information about important basic wealth topics.
Today we round out our dissection of the Balance Sheet with a review of Equity.
While the term Equity is generally used on corporate balance sheets, private individuals and families are more accustomed to the term Net Worth, though I’m not particularly sympathetic of that term as it attaches too much emphasis on money when assessing one’s worth. I prefer Net Wealth, though Excess Value Creation might also be an appropriate term to express the worth created by one’s own efforts.
In a corporate setting, the Equity section gives a glimpse into second mechanism of funding the company’s ownership of assets, specifically through the sale of ownership interest in the company and through reinvestment of profits, to name a few. A reminder that Liabilities are the other alternative to asset financing.
Equity also represents how much money the corporate owners would receive in the event that all corporate assets were sold off and all corporate debts repaid. As a result, some also refer to the Equity as the company’s Book Value.
And this is how it ties into a more personal balance sheet. When subtracting personal liabilities from personal assets, one is able to demonstrate one’s own personal Net Worth, or Net Wealth.
With that simple mathematical formula in made, it’s not difficult to comprehend that Equity can be positive or negative.
For example, if a company has more Assets than Liabilities, the Equity will be positive.
But if the company has more Liabilities than Assets, Equity is now negative. This doesn’t necessarily spell disaster, as long as the company is able to dig out of the hole in the near future.
Of course, the same goes for personal Net Worth. And, sadly, as our society continues to bankroll its spending habits through debts, more and more people are finding their Net Wealth dropping off a cliff and, in some cases, sliding into a hole with a negative number dimming the future prospects of their wealth.
As such, it should not be surprising that learning more about Equity and Net Worth is important in measuring a company’s financial viability along with understanding one’s own financial situation.
Why would one want to invest in a company where it’s likely an ownership share would never see any return of money?
And, on a more personal note, why would anyone want to lend more money to someone who’s far into a financial hole?
But on that dismal point, time to wrap up this Scribble on Equity. Regardless of your Net Wealth’s situation, whether positive or negative, we’re here to help you create and protect your wealth. Reach out to us through our Contact page. We’ll connect with you very soon thereafter. Take a big step towards having a better opportunity to enjoy your wealth, now and in the future.
Together to self-ownership and happiness so we can win at life,
Adrian