Equity

The equity in a business is the capital the owners have contributed themselves, or that has been earned through the reinvestment of profits.

Equity is divided into contributed equity and retained equity. Contributed equity is what has been supplied to the company through the owners' own contributions, while retained equity is earlier years' profit that is kept in the company.

Separate rules apply to limited companies (aksjeselskap). The share capital counts as part of the contributed equity. Under the Norwegian Companies Act, a company must at all times have an equity that is adequate in view of the risk and the scale of its business. If the equity falls below an adequate level, the board must meet in order to put in place measures to improve the situation.

How equity is calculated

Put simply, the equity is the company's assets less all its liabilities.

What is it used for?

Equity is important in several ways:

1. Financing: Equity acts as a source of long-term financing for the business, and gives the owners a stake in the company.
2. Solvency: Equity acts as a buffer against losses and debt obligations. The higher the equity ratio, the better the business's ability to meet financial challenges and maintain its solvency.
3. Return: Equity gives the owners the right to share in the business's profit and earnings, through dividend payments or capital gains.

Tips for increasing equity

1. Capital injection: The owners can supply more capital to the business by investing more money or assets.
2. Building up profit: The business can increase its equity by retaining the profit in the company instead of paying it all out as a dividend.
3. Issuing shares: Issuing new shares can increase the equity by attracting new investors or shareholders who invest capital in the business.
4. Capital allocation: Managing the business's capital resources properly can help maximise the profit, and thereby increase the equity over time.