Equity Ratio

Equity Ratio

Formula

$$\text{Equity ratio} = \frac{\text{Total shareholders’ equity}}{\text{Total assets}}$$

Explanation

• Shows what percentage of assets is financed by shareholders.
• Higher equity ratio = more protection for creditors.
• Debt ratio + Equity ratio = 100%.

Satisfactory level

• Higher equity ratio is safer, but too high might mean the firm is not using cheap debt financing at all.

Example

• Shareholders’ equity = RM3,000,000
• Total assets = RM6,000,000

$$\text{Equity ratio} = \frac{3,000,000}{6,000,000} = 50\%$$

Same company as above: 50% equity, 50% debt.