Is Stockholder's Equity Considered Debt?

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There are three different types of financial statements: the income statement, the balance sheet and the cash flow statement. Each one provides the investor with a different set of financial information about the company. The balance sheet provides an overview of company assets, liabilities and stockholder's equity. Liabilities are split between long and short term debt, which is not the same as stockholders' equity.

Debt and Equity

  • To understand the difference between stockholder's equity and debt, you must know the balance sheet equation, which is assets equals liabilities plus stockholder's equity. This means that the company's assets are paid for with debt and equity. Equity is considered ownership in the company and does not require repayment. Debt, however, is a financial obligation to the creditor.

Stockholder's Equity

  • Stockholder's equity is comprised of the company's retained earnings at the end of the year, as well as investment accounts from stockholders and other investors within the company. Any money the company obtains for the purchase of assets, including cash on hand, does not require repayment as it is becomes equity.

Debt

  • Alternately, any money or asset received that a company must return or repay is debt. While preferred stock exhibits characteristics of both debt and equity products, there is little room for overlapping between the two. As a result, stockholder's equity is not debt. Additionally, most savvy investors look for a company with both debt and equity on the balance sheet.

Finding the Right Mix

  • One thing most investors and creditors want to know before they invest in a company is the amount of debt and equity the company holds. The more debt a company holds, the more obligations it must meet with future earnings. Given this view, some novice investors may think it's better to invest in a company with no debt, however, debt can also represent a tax shelter; that is, interest payments are tax deductible.

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