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Equity Ratio

 

Equity ratio is a financial ratio that compares company’s equity to assets. Basically, it shows what part equity capital makes in total capital of a company. If ‘equity ratio’ is very high (close to 1), that means such company has very few debt and considered to be a safe one. 

 

The meanings or equity ratio may vary over sectors. For safer sectors normal equity ratio should be between 0.4 and 0.6 while companies of more volatiles sectors should maintain this ratio at higher level. Companies with low equity ratio can be considered as risky ones, and in any case this ratio should be between 0 and 1.

 

Equity ratio formula


Equity ratio = Shareholders’ equity / Total assets

 

* Total assets and shareholders’ equity can be found in company’s balance sheet. Shareholder’s equity can be also recognized as ‘book value’, ‘shareholders’ ownership’ or ‘equity value’.


** This ratio also may be converted in to percents by multiplying it by 100%. 

 

Other similar ratios that suits for solvency analysis are ‘debt to assets’ and ‘debt to equity’. ('Equity to asset ratio' is an analogous ratio). 

 






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