equity ratio

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.

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