Equity-to-Asset Ratio

Equity-to-Asset 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, providing insight into the Financial Leverage and overall financial health of a company.

Formula:
Equity-to-Asset Ratio = Total Equity / Total Assets

Examples:

• If a company has total assets of $1,000,000 and total equity of $400,000, the equity-to-asset ratio would be 0.4, or 40%. This indicates that 40% of the company’s assets are financed by equity.
• In another case, if a company has total assets of $500,000 and total equity of $250,000, the equity-to-asset ratio would be 0.5, or 50%, suggesting a balanced approach between debt and equity financing.

Cases:

• A company with a high equity-to-asset ratio (e.g., 70%) is generally considered less risky, as it relies more on equity financing rather than debt.
• Conversely, a low equity-to-asset ratio (e.g., 20%) may indicate higher financial leverage, which could lead to increased risk during economic downturns.