As we mentioned earlier in this lesson, equity is equal to total assets minus total liabilities. It represents the part of the company that is owned by shareholders; thus, it's commonly referred to as shareholders' equity. It is also referred to as net assets, or net worth. Although there are several line items within equity, the two main categories investors should focus on are retained earnings and treasury stock.
Retained Earnings. This line item represents the total profits the company has earned since it began, minus whatever has been paid to shareholders as dividends. Because this is a cumulative number, if a company has lost money over time, retained earnings can be negative and would be renamed "accumulated deficit."
Treasury Stock. This line item shows how much of its own stock a company has repurchased. Because repurchasing stock is analogous to paying dividends to investors--and in some cases can be even more desirable--investors should take note of changes in this account to see how much stock a company is repurchasing from one period to the next.
The Bottom Line >>