equity capital is the part of a company's financing that belongs to the owners. It constitutes the difference between the company's assets and its debts, and can thus be seen as the company's "net worth". Equity always appears in 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 worth DKK 5 million and debt of DKK 3 million. DKK, the equity amounts to DKK 2 million. DKK
What does equity consist of?
- Indskudt kapital - the amount the owners have invested in the company (e.g. company capital in an ApS or A/S).
- Reserver – saved funds that have not been paid out as dividends.
- Retained earnings - previous year's profits, which have remained in the company.
- This year's result – profit or loss from the last financial year.
Meaning of equity
Equity shows how robust a company is financially. A high equity means greater financial strength, better opportunities to attract loans and investments and a better ability to withstand losses. Conversely, a low or negative equity can signal financial challenges and uncertainty about the company's continued operation.
Equity and corporate law
In Denmark, the 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 the equity falls below half of the company's capital, the management has a duty to react, often by calling a general meeting and explaining the company's future.
Example
A company has the following balance sheet:
- Assets: DKK 1,200,000
- Liabilities: DKK 800,000
The equity becomes: 1,200,000 – 800,000 = DKK 400,000.
Equity is therefore a key figure, both for the company's owners, investors and lenders, as it reflects the company's financial health.