Equity shows what would remain for shareholders after settling all debts. It consists of share capital, retained earnings from prior years, reserves, and revaluation adjustments.
Equity grows in two ways: through profits retained in the company instead of paying dividends, and by attracting funds through new share issuance. The second method increases capital but dilutes existing shareholders' stakes if they don't participate in the offering.
Equity serves as the denominator for calculating profitability and the basis for assessing leverage: the ratio of borrowed to equity capital characterizes company stability. A negative value means liabilities exceed assets and signals serious problems.
For banks, this metric has special regulatory significance: capital adequacy is regulated, and its decline limits lending capacity. This is why reserve increases, which reduce profit and equity, are more critical for banks than for industrial companies.