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Investment Dictionary


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Asset to Equity Ratio

 

Asset to equity ratio compares company’s assets to the book value and measures the riskiness of the company. This ratio cannot be lower than 1.0, and if it is equal to 1, it means that assets are equal to equity and there are no liabilities, however, such situation is more hypothetical while all active companies normally have at least some operational liabilities (not necessary financial debts). 

 

High ratio (more than 3) means that company’s financial leverage might be very high and such company might be at risk.

 

Asset to equity ratio formula


Asset to equity ratio = Total assets / Shareholders’ equity

 

* All the data needed for the calculation of this ratio can be found in the company’s balance sheet.

 

Another similar ratio is ‘equity to asset ratio’ which is reversal to this one. Also there are more ratios that can be used in solvency analysis: ‘debt to EBITDA’, ‘interest coverage ratio’ and many others.

 






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