Equity Ratio

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and notes

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Equity Ratio

Equity Ratio =

Total Equity

Total Assets

Solvency and sustainability

INTERPRETATION

The equity ratio indicates how much of a company’s assets are financed by investors. The inverse of this calculation shows the percentage of assets that were funded by debt.

Note: expanded calculation

Divide total equity by total assets.

EXAMPLE

M&M reported total assets of $150,000 and total liabilities of $50,000, and based on the accounting equation; we can assume the total equity is $100,000.

Equity ratio = $100,000 / $150,000 = .67

Shareholders currently own 67 percent of the company’s assets, meaning shareholders, not creditors, financed more assets.

BENCHMARK: HA, PG, EB, ROT

A “good” ratio varies by industry, but most companies aim for an equity ratio of around 50%.

Typically, companies with higher equity ratios are seen as more favorable because the company is considered more sustainable and less risky to lend money to in the future.

On the other hand, if the company’s debt far exceeds its equity, this lower ratio signifies that it may be at risk of insolvency.

Equity Ratio:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.