Definition
A financial ratio which measures the degree of leverage employed by a business, the equity ratio quantifies the percentage of their overall assets which is funded by stockholders, and never creditors (or debt). The equity ratio just takes 2 inputs, owner‘s equity and total resources; both which is observed on an organizations balance sheet.
Calculation
Equity Ratio = Total Owner’s Equity / Total Assets
Explanation
Also referred to because the shareholder’s equity ratio, so you will find two different schools of thought about the way to translate the consequences with the metric.
- Optimistic Outlook: A minimal equity percentage can create fantastic consequences for stockholders, provided that the provider earns an interest rate of return on resources which is higher compared to the rate of interest paid for lenders.
- Pessimistic Outlook: A top equity percentage offers security to investors at case a business is liquidated, as the majority of the resources are funded by equity and debt. (Rememberthat the debt collectors have been paid during bankruptcy proceeding )
Example
Company A’s balance sheet indicates total stockholder equity of 15,420,000 and overall assets of 31,616,000. The equity ratio for Company A will be:
= 15,420,000 / $31,616,000, or 0.49
