Average Total Equity
Definition
Average total equity is the average carrying value of equity that are recorded on the balance sheet at the different reporting dates. Usually, the carrying value of equity at the end of the previous year and those at the end of the current year are used in the calculation to find average total equity on the balance sheet.
We usually use the average total equity to calculate the return on equity or ROE as it is one of the main financial ratios to measure the company’s ability in the utilization of the resources, its equity, to generate the profit.
Average Total Equity Formula
We can calculate average total equity by using formula of total equity value at the end of the current year plus total equity value at the end of the previous year and then divide the result by two.
Average Total Equity Example
For example, we have the extracted balance sheet as below:
| Extracted Balance Sheet | 31 Dec 2019 | 31 Dec 2018 | |
|---|---|---|---|
| Current liabilities | $ | $ | |
| Interest payables | 600 | 788 | |
| Account payables | 4,600 | 3,800 | |
| Accruals | 2,800 | 2,650 | |
| Other current liabilities | 1,200 | 800 | |
| 9,200 | 8,038 | ||
| Non-current liabilities | |||
| Note payables | 35,000 | 45,000 | |
| Other non-current liabilities | 3,155 | 3,155 | |
| 38,155 | 48,155 | ||
| Total liabilities | 47,355 | 56,193 | |
| Equity | |||
| Share capital | 65,000 | 65,000 | |
| Retained earnings | 29,572 | 17,500 | |
| Profit/(Loss) current year | 15,360 | 12,072 | |
| Total equity | 109,932 | 94,572 | |
| Total liabilities and equity | 157,287 | 150,765 | |
Calculate average total equity and ROE in 2019 based on the extracted balance sheet above.
Calculate Average Total Equity
With the average total equity formula above, we can calculate as below:
Total equity value at 31 Dec 2019 = $109,932
Total equity value at 31 Dec 2018 = $94,572
Then
Average Total Equity = (109,932+94,572) / 2 = $102,252
So, the average total equity is $102,252 which we can use to calculate the return on equity ratio.
In this case, we can calculate return on equity by using the net profit in 2019 and the average return on equity figure as below:
Return on Equity = 15,360 / 102,252 = 15.02%