Financial Statement Analysis

- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Cash Flow from Operations Ratio
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity
- Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score

- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio

- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- OIBDA
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- CFROI
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- EBITDAR
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula

- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula

## What is Equity Ratio?

Equity Ratio is a financial ratio that is used to measure the proportion of owner’s investment used to finance the assets of the company and it indicates the proportion of owner’s fund to total fund invested in the business. Traditionally it is believed that higher the proportion of the owner’s fund lower is the degree of risk. The investors will end up getting all the remaining assets left after paying off the liabilities.

### Equity Ratio Formula

Equity ratio is calculated as shareholders’ equity divided by total assets and it is mathematically represented as,

**Equity Ratio Formula = Shareholder’s Equity / Total Asset**

Shareholders’ equity includes Equity share capital, retained earnings, treasury stock etc. and Total assets are the sum of all the non-current and current assets of the company and it should be equal to the sum of shareholders’ equity and the total liabilities.

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### Interpretation of Equity Ratio Calculation

- Since this ratio calculates the proportion of owners’ investment in total assets of the company, Therefore, a higher equity ratio is considered to be favorable for the companies.
- A higher level of investments by the shareholders attracts more investment by the potential shareholders as they think that the company is safe for investing as already the level of investment by the investor is higher.
- Also, a higher investment level provides a level of security to the creditors as it shows that the company is not that risky to deal and they can lend fund thinking that the company will be able to easily pay off its debt.
- Companies having higher equity ratio also suggest that the company is having less financing and debt service cost as the higher proportion of assets are owned by equity shareholders and there is no financing cost including interest in financing through equity share capital as compared to the cost which is incurred in debt financing and borrowing through banks and other institutions.
- It is suggested that if possible companies should go for the equity financing rather than debt financing because equity financing is always economical as compared to debt financing because there are various financing & debt service cost associated with debt financing and it is mandatory to pay off such debts whether the business is in a good state or not.

### Equity Ratio Calculation Examples

**Let’s take an example of a company named jewels ltd involved in the manufacturing of jewellery whose balance sheet reported the following assets and liabilities:**

- Current Assets: $30,000
- Non-Current Assets: $70,000
- Shareholders’ Equity: $65,000
- Non-Current liabilities: $20,000
- Current Liabilities: $25,000

**Total Assets = Current Assets + Non-Current Assets**

= $100,000

Shareholders’ Equity = $65,000

Therefore,

**Equity Ratio Formula = Shareholder’s Equity / Total Asset**

= 0.65

We can clearly see that the equity ratio of the company is 0.65. This ratio is considered to be a healthy ratio as the company has much more investor funding as compared to debt funding. The proportion of investors is 0.65% of the total assets of the company.

### The Significance of Equity Ratio Calculation

- The company having an equity ratio calculation greater than 50% is called a conservative company whereas a company has an equity ratio of less than 50% is called a leveraged firm. In the given example of jewels ltd, since the equity ratio is 0.65 i.e. Greater than 50%, the company is a conservative company. Conservative companies are less risky as compared to leveraged companies.
- Conservative companies have to pay dividends only if there is profit but in the case of leveraged companies interest has to be paid no matter the company is earning profits or not. So, the companies with higher equity ratios face less risk and the creditors and the investors prefer to lend and invest in high Equity Ratio Company because it reflects that the company is managed conservatively and pay off the creditors timely.
- Also, the companies which are having higher ratio are required to pay less financing cost thereby having more cash for future growth &expansions; on the other hand companies with lower ratios have to pay more cash to pay off its interest and debt
- It also reflects a company’s overall financial strength. It is also used to check whether the capital structure is sound or not. A higher ratio shows a higher contribution of the shareholders and indicates that the company is having better long-term solvency position and on the other hand there is a high risk to creditors in case of lower equity ratio.

### Conclusion

It calculates the proportion of total assets financed by the shareholders as compared to the creditors. Generally a higher equity ratio is preferred in the company as there is safety in terms of payment of debt and other liabilities because if more financing is done through equity then there is no liability of paying interest etc. and dividend is not an obligation, it is paid if the company is earning profits but a low equity ratio can also be seen as a good result for the shareholders if the interest rate paid to creditors is less than the return earned on assets. Therefore it is advised to the potential investors and creditors that equity ratio calculation should be analyzed from every angle before taking any decision while dealing with the company.

### Recommended Articles

This has been a guide to what is Equity Ratio. Here we discuss Equity Ratio calculation using its formula (shareholder’s equity / Total assets) with examples and analysis. You may also have a look at the following financial analysis articles –

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