Equity Ratio

The Equity Ratio is a financial ratio that represents the proportion of the total assets that are financed by stockholders, and not creditors.  The ratio suggests the long-term solvency position of the business.

Equity Ratio

The Equity Ratio is a financial ratio that represents the proportion of the total assets that are financed by stockholders, and not creditors.  The ratio suggests the long-term solvency position of the business. This ratio equity ratio is a variant of the Debt-to-Equity Ratio.


Equity Ratio Formula

The Equity Ratio is calculated by dividing the shareholders’ funds by the total assets.

Equity Ratio formula: Shareholders Equity / Total assets

Interpretation of Equity Ratio

Companies having a low Equity Ratio have to pay less interest thus having more free cash on hand for future expansions, growth, and dividends.

A low Equity Ratio provides a freer access to capital at lower interest rates. On the other hand, a high Equity Ratio makes it difficult for a company to obtain a loan from financial institutions. If the company manages to get a loan, it is at high(er) interest rates.

A low equity ratio will produce good results for stockholders, as long as the company earns a rate of return on assets that is greater than the interest rate paid to creditors.

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