Equity ratio

The equity ratio in a company shows what percentage of the assets is financed by equity. The key figure is often referred to as solvency (soliditet), and in everyday use the two are treated as interchangeable. Strictly speaking, soliditet is a wider concept covering a company's ability to withstand losses, measured by several key figures — among them the debt-to-equity ratio and the interest coverage ratio. The equity ratio is the single most important measure of soliditet.

The equity ratio shows how dependent a company is on financing through debt or other outside capital. A high equity ratio indicates a company that is less dependent on debt financing, while a low equity ratio is an indication that the company has a high proportion of debt.

There is no universal standard for how high or low the equity ratio ought to be. The ideal level varies between industries, according to how debt-financed they want to be.

Some segments depend on a high proportion of debt in order to finance large investments, while others avoid debt in order to reduce risk and minimise interest expenses. It is important to remember that a company with a low equity ratio will be more exposed to changes in interest rate levels and economic conditions.

How it is calculated

The equity ratio is calculated by dividing the equity by the total capital, and then multiplying by 100 in order to get a percentage. The formula is as follows:

Equity ratio = (Equity / Total capital) × 100

What is it used for?

As a key figure, the most interesting thing is to look at the development of the equity and at the equity ratio compared with the industry standard. Changes can indicate whether a company has suddenly taken on new debt, or has built up equity through the reinvestment of earned funds.

Comparison with the industry standard can indicate whether the financing is sound in the light of the rest of the industry. This can be used to evaluate risk, long-term viability and profitability, among other things.

Tips for increasing the equity ratio

1. Accumulating profit. Retain the profit in the business instead of paying it all out as a dividend. This increases the equity and thereby the equity ratio.
2. Share issue. Issuing new shares can supply more equity to the business and increase the equity ratio.
3. Capital injection. The owners can supply more capital to the business by investing more money or assets.
4. Debt reduction. Reduce the business's debt in order to increase the equity ratio. This can be achieved through the repayment of loans or the restructuring of debt.
5. Optimal capital allocation. Consider the balance between debt and equity in order to make sure the business has an appropriate and sustainable financing structure.
6. Share buy-back. If it is possible and appropriate, the business can buy back its own shares in order to increase the equity ratio.

Read more about how the key figures in Capassa show the development of the equity ratio over time.