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Equity ratio definition

Description

Equity ratio indicates which part of the company’s assets was owned from shareholders’ funds. This ratio is very similar to equity multiplier. The only difference is that in one way denominator is equity (equity multiplier), and in another – assets (equity ratio). Data to calculate this ratio is collected from balance sheet.

As this ratio shows capital structure, it is interesting for both company’s owners and creditors. Equity ratio is also used to evaluate company’s long term solvency position.

Norms and limitations

There are no general norms for this ratio.

A higher value of equity ratio indicates a lower financial leverage. It means that company’s activity might be considered as safe.

Formula

Assets (Total assets) – mean every asset that the company owns and that is shown on the balance sheet. Total assets equals total liabilities + owner’s equity.

Equity (Shareholders’ equity) shows the equity stake currently held on company’s balance sheet. In other words, it means total assets minus total liabilities.