Equity ratio

The equity ratio is a financial ratio indicating the relative proportion of equity used to finance a company's assets. The two components are often taken from the firm's balance sheet or statement of financial position (so-called book value), but the ratio may also be calculated using market values for both, if the company's equities are publicly traded.

The equity ratio is a very common financial ratio, especially in Central Europe, while in the US the debt to equity ratio is more often used in financial (research) reports.

Formula

\mbox{Equity Ratio} = \frac{\mbox{Total Shareholder's Equity}}{\mbox{Total Assets}}

Interpretation

Equity Ratio is a good indicator of the level of leverage used by a company. The Equity ratio measures the proportion of the total assets that are financed by stockholders and not creditors. 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.[1]

References

  1. ↑ http://www.money-zine.com/Definitions/Investing-Dictionary/Equity-Ratio/