What is the equity ratio?

Key takeaways

• The equity ratio, also known as the net asset ratio, is an important metric for evaluating a company's debt-paying ability and financial structure.

• Equity Ratio = (Shareholders' Equity / Total Assets) × 100%

• A low equity ratio indicates excessive borrowing, which might weaken a company's ability to withstand external shocks. Conversely, a high equity ratio may suggest the company is not leveraging financial opportunities to expand its operations.

Understanding equity ratio

The equity ratio indicates the proportion of a company's assets financed by shareholders' equity, reflecting the company’s own capital and financial stability. The formula for calculating the equity ratio is:

Equity Ratio = (Shareholders' Equity / Total Assets) ×100%

Both shareholders' equity and total assets are typically taken from the fiscal period end values.

A higher equity ratio means the company has a strong capacity to finance itself without relying heavily on debt, which is generally seen as a sign of financial health and lower risk. However, a very high equity ratio may indicate that the company is not leveraging financial opportunities to grow its operations.

Analyzing the equity ratio can help guide the optimization of a company's capital and debt structure. Generally, an equity ratio between 30% and 60% is considered appropriate. It's important to note that optimal capital structures may vary across industries, and comparing equity ratios between different industries might not be meaningful.

Example of the equity ratio

Let's take a look at Apple Inc.'s balance sheet from its 2021 fiscal year report, ending on September 25, 2021:

The annual report shows that:

• Shareholders' equity at the end of fiscal year 2021: $63.09 billion

• Total assets at the end of fiscal year 2021: $351.02 billion

This gives us the equity ratio for Apple Inc. at the end of fiscal year 2021:

Equity Ratio = ($63.09 billion/$351.02 billion) ×100%=17.97%