What components make up shareholders' equity?

Shareholders' equity represents the ownership interest of shareholders in a company and is a crucial part of the balance sheet. It is primarily comprised of common shares and retained earnings.

Common shares are the primary form of ownership equity that indicates ownership in the company, and holders of these shares typically have voting rights. Retained earnings, on the other hand, reflect the accumulated profits that a company has reinvested into the business rather than distributing them as dividends. Together, these components signify the net worth of the company from the shareholders' perspective, indicating what is left for shareholders after all liabilities have been subtracted from assets.

Understanding that shareholders' equity consists of these components helps clarify the financial position and performance of a company, as it shows how much of the company's assets are financed by shareholders versus creditors. This is a key part of evaluating a company's financial health and investment potential.