{"concept":{"id":45,"slug":"equity","term":"Equity","shortDefinition":"The part of a company that belongs to its shareholders -- what's left of assets after subtracting all liabilities.","longDefinition":"Equity (shareholders' equity) is the part of a company that belongs to its own shareholders: what's left of assets after subtracting all liabilities. It's made up mainly of capital contributed by shareholders when founding or expanding the company, and of accumulated profits over the years that haven't been distributed as dividends. It's the piece that closes the accounting identity that defines the balance sheet -- Assets = Liabilities + Equity -- and that's why it's also rightly called the company's \"book value\": what would, in theory, be left for shareholders if all assets were sold and all debt paid off."},"relations":{"requirement":[],"contrast":[],"related":[{"concept":{"id":42,"slug":"balance-sheet","term":"Balance sheet","shortDefinition":"Financial statement that shows what a company owns and owes at a specific instant, organized into assets, liabilities, and equity.","longDefinition":"The balance sheet is one of the three financial statements: the one that answers what a company owns and owes at a specific instant, not over a period. Unlike the income statement, which is a movie of an entire period, the balance sheet is a snapshot -- a fixed image of the company's financial position on an exact date, usually the close of a quarter or a year. It's organized into two blocks that are always in balance: assets (everything the company owns and controls) on one side, and liabilities plus equity (everything it owes to third parties and to its own shareholders) on the other. That equality -- Assets = Liabilities + Equity -- isn't an accounting coincidence, it's the identity that defines a real balance sheet: everything a company owns has been financed somehow, either with debt or with its own capital."}},{"concept":{"id":54,"slug":"debt-to-equity-ratio","term":"Debt-to-equity ratio","shortDefinition":"A ratio that measures how a company is financed -- what proportion of its resources comes from debt (liabilities) versus its own capital (equity).","longDefinition":"A debt-to-equity ratio measures how a company is financed as a whole: what proportion of its resources comes from third parties (liabilities) versus what comes from its own shareholders (equity). The most common ratio compares liabilities and equity directly -- the higher that proportion, the greater the weight of debt in the company's total financing versus its own capital. The exact definition matters: comparing a company's total liabilities, which includes non-financial items like what it owes suppliers, isn't the same as comparing only its financial debt with a real cost (loans, bonds issued). A high debt-to-equity ratio isn't automatically a bad sign -- some sectors with stable assets and predictable cash flows (utilities, real estate) operate structurally with higher debt levels than others, because their business allows and justifies it."}},{"concept":{"id":59,"slug":"invested-capital","term":"Invested capital","shortDefinition":"Financial debt plus equity -- all the capital financing a company's business, regardless of whether it comes from third parties or its shareholders.","longDefinition":"Invested capital is the sum of a company's financial debt and equity -- all the capital financing its business, wherever it comes from. It's important to distinguish financial debt from total liabilities, the same nuance already covered when calculating the debt-to-equity ratio: total liabilities include non-financial items, like what's owed to suppliers, which aren't part of invested capital because they carry no explicit financial cost. Invested capital is ROIC's denominator, and its precise definition matters as much as ROIC's own -- confusing financial debt with total liabilities inflates invested capital and distorts the calculated ROIC."}}],"calculatedBy":[{"concept":{"id":55,"slug":"roe","term":"ROE","shortDefinition":"The return a company generates on the capital its own shareholders have invested -- net income divided by equity.","longDefinition":"ROE (Return on Equity) measures how much profit a company generates in relation to the capital its own shareholders have invested -- it's calculated by dividing net income by equity, both already covered in earlier modules. It's the first profitability ratio in this level, distinct from the liquidity and debt-to-equity ratios already covered: it doesn't measure whether the company can pay its debts, but whether shareholders' capital is being put to good use. A high ROE doesn't automatically mean a company is excellent -- it may reflect real business efficiency, or it may be inflated by a high level of financial leverage. Distinguishing between the two causes is exactly what the DuPont decomposition allows."}},{"concept":{"id":73,"slug":"pb-ratio","term":"Price-to-Book (P/B)","shortDefinition":"A multiple that compares a share's price with the equity attributable to it -- especially informative for asset-intensive or financial companies.","longDefinition":"Price-to-Book (P/B) compares a share's price with the equity attributable to it -- the company's equity, already covered in Level 2, divided across the number of shares. It's especially informative for asset-intensive companies -- where what the company owns is a relevant reference -- or for financial institutions, where earnings can be more volatile than equity. In businesses with few tangible assets, like many service companies, P/B tends to be much less informative than the P/E ratio or EV/EBITDA."}}]},"curricularPosition":[{"id":35,"moduleId":12,"slug":"what-are-assets-liabilities-and-equity","title":"What are assets, liabilities, and equity?","summary":"You understand what assets are, what liabilities are, and what equity is, and why Assets = Liabilities + Equity is always true.","bodyMarkdown":"## Objectives\n\nBy the end of this lesson you understand what assets are, what liabilities are, and what equity is, and why Assets = Liabilities + Equity is always true.\n\n## Content\n\nAssets are everything a company owns and controls at the instant the balance sheet reflects, already covered in the previous lesson: cash, accounts receivable, inventory, machinery, buildings, brands, stakes in other companies. They're usually ordered from most to least liquid, and split into current (expected to be converted into cash or consumed within a year) and non-current (long-term assets). That current/non-current distinction is the basis for calculating working capital, the topic of the next lesson.\n\nLiabilities are everything a company owes to third parties who aren't its own shareholders: bank debt, bonds issued, unpaid suppliers, accrued wages, tax obligations. Like assets, they're split into current (obligations due within a year) and non-current (long-term debt). Liabilities represent the part of the company's financing that comes from outside.\n\nEquity is the part of the company that belongs to its own shareholders: what's left of assets after subtracting all liabilities. It's made up mainly of capital contributed by shareholders and accumulated profits that haven't been distributed as dividends. It's the piece that closes the accounting identity already covered in the previous lesson -- Assets = Liabilities + Equity -- and that's why it's also called the company's \"book value\": what would, in theory, be left for shareholders if all assets were sold and all debt paid off.\n\n## Example\n\nA company with 100 in assets, financed with 60 in bank debt (liabilities) and 40 in capital contributed by its founders plus accumulated profits (equity), has a balance sheet that balances exactly: 100 = 60 + 40. If that company generated losses the following year, equity would shrink by that amount -- losses are subtracted directly from the value that belongs to shareholders.\n\n## Common mistakes\n\n- Confusing liabilities with \"everything bad\" on the balance sheet -- liabilities are simply a source of financing, not a judgment on a company's health; the reasonable level of debt depends on the sector and the business.\n- Thinking equity is \"cash in the bank\" available to the company -- it's a derived book value, not a cash item; the company's real cash sits within current assets.\n\n## Summary\n\nAssets are everything the company owns and controls. Liabilities are everything it owes to third parties. Equity is what belongs to shareholders, the difference between assets and liabilities -- and that difference is, by definition, always exact.\n\n## Self-check\n\nWhy isn't equity the same as the company's available cash?\n\nWhat happens to a company's equity if it generates losses during a fiscal year?","bodyHtml":"

Objectives

\n

By the end of this lesson you understand what assets are, what liabilities are, and what equity is, and why Assets = Liabilities + Equity is always true.

\n

Content

\n

Assets are everything a company owns and controls at the instant the balance sheet reflects, already covered in the previous lesson: cash, accounts receivable, inventory, machinery, buildings, brands, stakes in other companies. They're usually ordered from most to least liquid, and split into current (expected to be converted into cash or consumed within a year) and non-current (long-term assets). That current/non-current distinction is the basis for calculating working capital, the topic of the next lesson.

\n

Liabilities are everything a company owes to third parties who aren't its own shareholders: bank debt, bonds issued, unpaid suppliers, accrued wages, tax obligations. Like assets, they're split into current (obligations due within a year) and non-current (long-term debt). Liabilities represent the part of the company's financing that comes from outside.

\n

Equity is the part of the company that belongs to its own shareholders: what's left of assets after subtracting all liabilities. It's made up mainly of capital contributed by shareholders and accumulated profits that haven't been distributed as dividends. It's the piece that closes the accounting identity already covered in the previous lesson -- Assets = Liabilities + Equity -- and that's why it's also called the company's "book value": what would, in theory, be left for shareholders if all assets were sold and all debt paid off.

\n

Example

\n

A company with 100 in assets, financed with 60 in bank debt (liabilities) and 40 in capital contributed by its founders plus accumulated profits (equity), has a balance sheet that balances exactly: 100 = 60 + 40. If that company generated losses the following year, equity would shrink by that amount -- losses are subtracted directly from the value that belongs to shareholders.

\n

Common mistakes

\n\n

Summary

\n

Assets are everything the company owns and controls. Liabilities are everything it owes to third parties. Equity is what belongs to shareholders, the difference between assets and liabilities -- and that difference is, by definition, always exact.

\n

Self-check

\n

Why isn't equity the same as the company's available cash?

\n

What happens to a company's equity if it generates losses during a fiscal year?

","sortOrder":2,"readingMinutes":9,"difficulty":"Básico","url":"/en/academy/business-analysis/balance-sheet/what-are-assets-liabilities-and-equity"}],"graphSummary":{"root":{"type":"concept","id":"45","depthFromRoot":0,"entity":{"type":"concept","slug":"patrimonio-neto","term":"Patrimonio neto","excerpt":"La parte de la empresa que pertenece a sus accionistas -- lo que queda del activo tras restar todo el pasivo."}},"depth":1,"returnedNodes":1,"truncated":false,"hasCycle":false,"nodes":[{"type":"concept","id":"45","depthFromRoot":0,"entity":{"type":"concept","slug":"patrimonio-neto","term":"Patrimonio neto","excerpt":"La parte de la empresa que pertenece a sus accionistas -- lo que queda del activo tras restar todo el pasivo."}}],"edges":[]},"relatedNews":[],"relatedEntities":[]}