What does equity represent in a company?

Equity represents ownership interest in a company, reflecting the value that shareholders have in a business after all liabilities have been subtracted from total assets. This ownership is typically represented in shares of stock, indicating how much of the company each shareholder owns. In essence, equity shows a claim on the residual assets of the company once all debts have been settled, and it gives shareholders a right to a portion of the company's profits through dividends and the potential for capital appreciation.

Understanding this concept is crucial because equity provides insight into the financial health and performance of a company, serving as a measure of how much value is attributable to the owners. This contrasts with debt, which represents money owed to creditors and does not confer ownership, and expenses or projected profits, which relate more to operational performance rather than ownership stakes.