This equity ratio calculator estimates the proportion of owner’s/shareholder’s equity against the total assets of a company, showing its long term solvency position. There is in depth information on the formula of this financial indicator below the tool.
How does this equity ratio calculator work?
The formula used by this equity ratio calculator determines the relative proportion of total owner’s equity in comparison to the figure of the total assets a corporation owns.
Often referred to as the net worth to total assets ratio of a company and helping investors assess the overall financial strength and the capital structure of a business, the equity ratio formula (ER) can be found in specialty literature in one of the following expressions:
ER = Total Equity / Total Assets
ER = Total owner’s equity / Total Assets
ER = Total shareholder’s equity / Total Assets
ER = Total stockholder’s equity / Total Assets
The interpretation of the equity ratio level
Please note there are no certain rules on how high or low the equity ratio should be as this depends on a wide range of factors such as: the sector, area or the market a company operates in as there are differences from one industry to another, the general economic context or the interest rates level as the higher the cost of money borrowed is the less a company should borrow to finance its assets as this will result in higher costs with the interest paid thus it may result in a burden for the business. As a general interpretation rule:
A high level of equity ratio indicates that the shareholders have a high contribution in financing on employing capital into a specific company thus it is considered as a positive signal in regard of long term solvency position.
While, in case the equity ratio is low that may be a signal that the company relies too much on external sources to finance its business and this situation for creditors and investors is associated with a higher risk of a default. This is because the uncertainty in how the interest rates evolve over time which may impact the stability and the capacity of a corporation to repay its debts in full in due time.
Example of an equity ratio calculation
Let’s consider that an online based business has the following financial position:
Total assets = $500,000
Total owner’s equity = $200,000
The equity ratio that results is $200,000 / $500,000 = 0.40 (or 40.00%).28 Apr, 2015 | 0 comments