Equity is an important component of the balance sheet of a company or a bank and is also referred to as "own funds".
It represents the financial commitment of the owners or shareholders of a company and is thus an important variable for assessing the financial and earnings position of a company. Equity is shown on the liabilities side of the balance sheet and is made up of various components.
Equity includes, for example, subscribed capital (a company's share capital), capital reserves (e.g. from the issue of shares at a premium), retained earnings (from retained profits), as well as other equity items such as currency translation differences or valuation results from fair value accounting.
Sufficient equity is crucial for companies and banks, as it serves as a buffer in the event of economic difficulties and acts as a hedge in the event of impending losses. Banks in particular, due to their function as financial intermediaries, must pay particular attention to adequate capital adequacy in order to ensure investor and customer confidence in their financial stability.
By calculating equity ratios, such as the capital adequacy ratio or the Tier 1 ratio, investors and financial analysts can assess and compare the financial strength of a company or a bank. Equity ratios also play an important role in lending, as they provide information on how much equity the company has available to absorb possible loan defaults.
