3. Equity ratio:- Solvency ratio| Best way to track equity in a company’s total assets| Most important

What is the equity ratio

All the assets of the company are the result of shareholder’s equity, debt from creditors or a combination of both. The equity ratio is a simple calculation that can show you how much of a company’s assets are funded by the owner’s shares.

This ratio measures the ratio inside a company’s total assets that has been financed by promoters and shareholders.

Sometimes the this ratio is also known as shareholders equity.

Total assets are the sum of equity and liabilities. If a company has high equity in its assets, it means that the company is relatively better at managing risk to supply the needs of its assets. Conversely, if the percentage in debt is high, it means that the company is taking more risk and may be at risk of going bankrupt or insolvent.

Equity ratio formula

The ratio of total equity and total assets is known as equity ratio

Equity ratio = Total equity / Total assets

To calculate the shareholder’s equity ratio, you will need to know the total assets and total equity. Both numbers can be easily found on the company’s balance sheet. Total equity is also known as “shareholders’ equity”. To find out the total equity, you can calculate the difference between the total assets minus total liabilities of the company.

If you do not know about current assets, current liabilities, inventory, market security, etc. then you see the first post of the liquidity ratio which will help you in understanding the solvency ratio. Click on the link below to see the first post of the liquidity ratio

To get financial data of any Indian company, first of all, you can go to the website of moneycontrol.com and get all the data in the balance sheet section.

Example

Let’s take a look at a simplified example of a company that you can consider as an investment.

We are taking the example of a BHEL a company whose financial data you can find in the balance sheet section on the website named Moneycontrol.com

Company’s BriefsReults in Cr. (INR)
Total assets61,271.42
Total shareholder’s equity29,181.21

Using these data and the given formula, you can calculate the equity ratio of the company BHEL company.

Equity ratio of BHEL = 29181.21 / 61271.42 = 0.4762 = 47.26%

You saw in the above example that BHEL company has a equity ratio of 52%, this implies that 52% of the total assets of the BHEL company are financed from debt.

Analysis

Companies with an equity ratio below 50% are considered leveraged companies. Conversely, companies with equity ratios above 50% are often labeled as conservative companies.

Investors turn to this ratio that measures how much debt a company is using. Companies that rely more on capital are truly their own in the form of equity – because they are not high risk. If a company has more equity than debt, investors will be less concerned in times of financial crisis.

A high equity ratio gives a strong indication as well as indicating that the company is managing its assets effectively and will have an easier time paying off its debts immediately. The equity ratio reflects a company’s ability to meet its solvency or its long-term liabilities.

However, keep in mind that a much higher equity ratio than competitors is not the only indicator of good business. A high equity ratio means the company is at low risk. But at the same time, the company may lack insufficient funds to run its business effectively. Thus, it is a difficult time growing and investors may suffer from low returns in future. If possible, investors should find a balance between risk and security to get the most out of a profit.

Conclusion

  • If the equity ratio of a company is 70% to 80%, then it is seen as a good company and we can put companies of this type in our watchlist for investment.
  • If a company does not have debt or liabilities, it means that there may be a shortage of funds in the companies to operate their daily operations properly. To invest in this type, we should perform peer comparison so that we invest Get an idea to do
  • In any company, 20% to 30% debt of its total assets is considered a health liability.

Note

If you need a Damat account or trading account to invest in the share market and mutual funds, you can open it by clicking on the link given below.

Do not forget to subscribe to our Telegram channel if you prefer to invest in the stock market and mutual funds

Thank you for reading our post, God bless you all

If you like our post, Then share it with your friends and family.

1 thought on “3. Equity ratio:- Solvency ratio| Best way to track equity in a company’s total assets| Most important”

  1. The apex stock to actually purchase for 2021 range with small-cap diamonds in the rough similar to URBT to dominant emerging stocks. In the event, you have $300 free currently, the subsequent cutting edge stock could be ideal for opportunistic long-term investors. Urban Television Network Corp stock character URBT. I don’t know about you, but once I think about innovation, internet streaming services stocks one thinks of. Over the past decade, we have now perceived outstanding advancements in streaming bitrates along with devices that have been developed to support those services. We’ve witnessed major streaming services similar to Disney and Netflix snag market dominance, but this little recognized corporation Urban Television Network Corporation. has introduced tremendous streaming services URBTPlus Movies + Live TV. I believe this business is going to secure the urban internet streaming marketplace. The stock market forever has a few surprises waiting for you, as any shareholder in 2020 would attest. URBT has been surprising with a 500 increase over twelve months. But by and large, the major factor specialists are considering as they recognize the top stocks to acquire for 2021 is the same element that led to 2020: Corona Virus. And streaming service URBTPlus is answering the call. So as an opportunist check out Urban TV Network Corp. stock symbol (OTC: URBT). #top5investment2121

    Reply

Leave a Comment