The shareholders’ equity, or net worth, of a company equals the total assets (what the company owns) minus the total liabilities (what the company owes). If your company does well, its profits increase and its net worth increases too.

Net worth = assets – liabilities

Note that the net worth is additionally referred to as the owners’ equity, company’s book value, net book value, net assets and/or balance sheet value.

Shareholders’ equity (net worth) and the financial statements

When examining a company’s financial statements, it is important to recognize that the shareholders’ equity, or net worth, consists of two parts. One is the capital directly invested by the shareholders themselves, and the other is the retained earnings (an indirect investment). The retained earnings are the assets of your operation, generated through profitable business activity, which have been retained (that is, reinvested) in the business and not paid out to shareholders as dividends.

References

Plant, Albert C. (2007). The retail game: playing to win: a guide to the profitable sale of goods and services. Vancouver: Douglas & McIntyre Ltd.
Pratt, Jamie. (2003). Financial Accounting in an Economic Context. New York: John Wiley & Sons; 2003.