Equity Ratio

The equity ratio is a financial metric that measures the proportion of a company’s total assets that are financed by shareholders’ equity. It is calculated by dividing total equity by total assets and is expressed as a percentage. A high equity ratio indicates that a company is less reliant on debt to finance its operations, which generally signifies financial stability and lower risk. Conversely, a low equity ratio suggests that a company relies more on debt, increasing its financial leverage and associated risks.

Example

If a company has total assets of $10 million and total equity of $4 million, its equity ratio is 40%, indicating that 40% of its assets are financed by shareholders’ equity.