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Equity ratio

Method of calculation

Formula for equity ratio: equity / total assets * 100%

Ratio's description

The ratio measures the share of equity in all sources of financing, allowing to assess company's financial independence. Its values can be also interpreted in terms of the security of debt coverage with the use of possessed assets. If the share of equity in total assets (resulting automatically in high debt share) is low, then the security of debt coverage is considered low. With high or growing values of the ratio it is recommended to perform an analysis of debt structure from the point of view of its maturity – high share of long-term debt affects solvency to a larger extent.

Ratio's interpretation

  • High ratio's values and increasing trend is interpreted as an improvement of financial independence and an improvement of the security of debt coverage with existing assets.
  • Low ratio's values and decreasing trend is interpreted as a deterioration of financial independence and a deterioration of the security of debt coverage with existing assets (lowered debt capacity).

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