Equity is the part of a company’s financing that belongs to the owners. It represents the difference between the company’s assets and its liabilities, and can therefore be seen as the company’s "net worth". Equity always appears on the balance sheet in the annual accounts.
How is equity calculated?
Equity is calculated as:
Equity = Assets - Liabilities
If, for example, a company has assets of DKK 5 million and debt of DKK 3 million, equity amounts to DKK 2 million.
What does equity consist of?
- Paid-in capital - the amount the owners have invested in the company (e.g. share capital in an ApS or A/S).
- Reserves - retained earnings that have not been paid out as dividends.
- Retained earnings - previous years’ profits that have been retained in the business.
- Net profit for the year - profit or loss from the latest financial year.
The importance of equity
Equity shows how financially robust a company is. High equity means greater financial strength, better opportunities to attract loans and investment, and a stronger ability to withstand losses. Conversely, low or negative equity may signal financial challenges and uncertainty about the company’s ability to continue as a going concern.
Equity and company law
In Denmark, the Danish Companies Act sets requirements for companies’ equity. For example, an ApS must have a minimum capital of DKK 40,000, and an A/S must have a minimum of DKK 400,000. If equity falls below half of the share capital, management has a duty to act, often by convening a general meeting and accounting for the company’s future.
Example
A company has the following balance sheet:
- Assets: DKK 1,200,000
- Debt: DKK 800,000
Equity becomes: 1.200.000 - 800.000 = DKK 400.000
Equity is therefore a key metric for the company’s owners, investors, and lenders, as it reflects the company’s financial health.