Formula of Equity Ratio (Table of Contents)
What is Equity Ratio Formula?
Equity Ratio is kind of a solvency ratio or investment leverage which shall measure the number of total assets of the company that are financed by equity and the same can be measured by dividing Shareholders equity by total assets. The formula for calculating Equity Ratio is represented as follows,
 The equity ratio is a simple calculation of total equity that appears on the face of the balance sheet and dividing the same by total assets.
 Total equity would include the shareholders’ equity, all kinds of reserves and here preference share capital shall be avoided as it bears fixed dividend which almost bears like interest and can’t be avoided and would form part of total debt.
Examples of Equity Ratio Formula (with Excel Template)
The following examples will give us more clarity on the subject matter.
Equity Ratio – Example #1
Equity firm claims that its assets are mostly financed by them. It was noted that the total shareholders’ equity was $555,000 and the total assets were $695,000. You are required to compute Equity ratio and comment on the claimed made the equity firm.
Solution
Use the belowgiven data for calculation of equity ratio.
Therefore, the calculation of equity ratio is as follows,
=555000/695000
Calculation of Equity Ratio will be –
 Equity Ratio = 0.799
The Equity Ratio is 79% and the statement appears to be genuine of equity firm as it claimed mostly.
Equity Ratio – Example #2
DHFL aka Dewan Housing is a listed company on SENSEX and recently it has been downgraded by credit agencies as default grade. Analyst Wing has started coverage of this stock in order to know the truth behind its continuous stock price falling. He has collected the balance sheet details from publicly available information and the first thing he wanted to do is the analysis of debt they carried over the last 4 years and hence he decides to calculate equity ratio for the last 4 years.
The Balance sheet details are given below
Based on the above details you are required to calculate the Equity Ratio and comment if there was any trend which could have signaled alert regarding rising debt.
Solution
In this example, we will first calculate total equity shareholders as total assets are already given in the question.
4.9 (1,067 ratings)
Therefore, the calculation of total shareholders equity is as follows,
=145.68+4490.10
Total Shareholders Equity will be –
 Total Shareholders Equity = 4635.78
Similarly, we can calculate total shareholders’ equity for the year March 16, March 17 and March 18.
Therefore, the calculation of equity ratio is as follows,
=4635.78/54637.90
Equity Ratio will be –
 Equity Ratio will be – 8.48%
Similarly, we can calculate the equity ratio for year March16 March17 and March18.
It can be noted that the equity ratio was in singledigit past 4 years and even though this ratio was maintained the debt and borrowings of the company were growing as it can be seen from its balance sheet. This could have been a red alert for investors.
Equity Ratio – Example #3
Company X is a debtfree company and claims to be more than 90% financed by equity. It had total assets book value of $55,000,000 with equity being 54,100,000 and rest being its current liabilities. Company Y which is operating in same industry was eyeing to takeover company X and recently it did hostile takeover by acquiring 25% stake from Company X’s single large shareholder and the promoter’s shareholder stake was 20% and due to this Company Y tookover the board and after approval from shareholders decided to merge company x and company y to create company z. The consolidated balance sheet after the merger was per below:
The minority shareholder wanted to check whether after the merger does the company is equity dominated or debt dominated?
You are required to advise minority shareholders on the same by using the equity ratio.
Solution
In this example, we shall compute the total shareholder’s equity and then compute the equity ratio by dividing it by total assets.
Total equity will compose of equity share capital, general reserve, and statutory reserve.
Calculation of Total Shareholder’s Equity
=145.68+4490.10+1110.00
 Total Shareholder’s Equity = 5745.78
Therefore, the calculation of Equity Ratio is as follows,
=5745.78/55847.90
Equity Ratio will be –
Equity Ratio = 10.29%.
Company Y was heavily debt dominated and because of which the balance sheet of company x which now got consolidated looks to be debt dominated which was first equity dominated and this would be worrisome for minority shareholders.
Calculator
You can use these equity ratio formula calculator
Total Shareholders’ Equity  
Total Assets of the Firm  
Equity Ratio Formula  
Equity Ratio Formula = 


Relevance and Uses
As a thumb rule, the higher the equity ratios the greater it is for the firms. Reasons could be Higher Stake by equity investors depicts to potential shareholders that the firm is good stock as several investors are ready to finance the firm. For potential creditors, it depicts that the firm is less risky and more sustainable for future lending.
In general, compared to debt financing, equity financing is much cheaper there are interest expenses associated with debt. Firms with lower equity ratios would have more debt service costs and financing than firms with higher ratios.
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