Equity ratio

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The equity ratio is a financial ratio indicating the relative proportion of equity used to finance a company's assets. The two components are often taken from the firm's balance sheet or statement of financial position (so-called book value), but the ratio may also be calculated using market values for both, if the company's equities are publicly traded.

The equity ratio is a very common financial ratio, especially in Central Europe, while in the US the debt to equity ratio is more often used in financial (research) reports.

The formula for calculating D/E ratios can be represented in the following way: Debt - Equity Ratio = Total Liabilities / Shareholders' Equity The result may often be expressed as a number or as a percentage. This form of D/E may often be referred to as risk or gearing.

Interpretation[edit]

The Equity Ratio is a good indicator of the level of leverage used by a company. The Equity Ratio measures the proportion of the total assets that are financed by stockholders, as opposed to creditors. A low equity ratio will produce good results for stockholders as long as the company earns a rate of return on assets that is greater than the interest rate paid to creditors.[1]

References[edit]