In business finance, what does equity refer to?

In business finance, equity refers to the owner's interest in a company, representing the ownership stake in that business. It is calculated as the value of total assets minus total liabilities. Essentially, equity signifies the amount left for the owners or shareholders after all debts have been paid. This includes common stock, preferred stock, and retained earnings, making it a crucial component of a company's balance sheet.

Understanding equity is important because it reflects the financial health of a business and indicates how much of the company is funded by the owners compared to liabilities. An increase in equity often reflects a well-performing business, signaling growth and potentially increased returns for the owners. This focus on ownership interest is how equity distinctly stands apart from other financial concepts related to debts, revenue, or expenses in the context of a business's overall financial structure.