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What an Equity-to-Asset ratio means and how to calculate it?

DEFINITION:

Equity-to-Asset ratio (in Finnish, Omavaraisuusaste) can assist investors in determining the financial strength, health of a business and safety of investment. The ratio measures the portion of equity owned by shareholders when compared to the total assets.

It is used to:

  • to measure the company's solvency, i.e., ability of a company to pay all of its debt in case of necessity.
  • to assess a company's financial leverage, i.e., a company's reliance on debt to support its business operations.

FORMULA for calculations:

\[ {Equity\ to\ Asset} = {Total\ Stockholders\ Equity\over Total\ Assets} \]
\[ {Equity\ to\ Asset} = {Net\ Worth \over Total\ Assets} \]

Net worth is the difference between the value of all assets and the value of all outstanding liabilities.

RESULT INTERPRETATION:

Ratio is expressed as a percentage. The higher the resulting percentage, the less of a business is leveraged and the larger portion of its assets are owned by the company and its investors. And vice versa, а company with a smaller Equity to Asset ratio is more leveraged, and, hence, riskier to invest in.

Nevertheless, this metric varies across different industries, and it is important to compare the result to peers in the industry when analyzing. Some companies could have a higher leverage than others and it is not necessarily a cause for concern.

EXAMPLE:

So, what percentage of a company's assets do creditors own? Let's suppose, Business' Equity-to-asset Ratio is 0,25 (25%). Then, it means that the company owns just a quarter (25%) of its assets outright, whereas the rest of its assets is essentially owned and controlled by someone else, and it is a bank, as a rule.

Example of "EQUITY RATIO" calculation

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