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Metric · Capital Structure

Equity Ratio Explained

The equity ratio shows what share of total assets is financed by equity rather than debt. It's one of the central metrics for assessing a company's financial stability.

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Updated 20266 min read
Formula
Equity ratio = Equity ÷ Total assets × 100
> 40%Solid capital structure
20–40%Moderate capital structure
< 20%Low equity ratio
Guideline values, industry-dependent, illustrative

The formula in detail

The components of the formula at a glance.

Numerator
Equity
The company's book equity.
Denominator
Total assets
The company's entire asset base, current plus fixed assets.

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Result equity ratio
Solid capital structure
40.0 %
1
A ratio above 40% is generally considered a solid capital base with a corresponding buffer in downturns.
2
A ratio below 20% means high reliance on debt financing and greater vulnerability to interest-rate or earnings shocks.
3
Capital-intensive industries such as banks or utilities structurally tolerate lower ratios than margin-rich industrial or software companies.

Used in these strategies

Piotroski F-Score (9-Point Check)Nine hard balance-sheet criteria: separating substance from downward spirals.Altman Z-Score: Stress TestThe bankruptcy early-warning system: five balance-sheet ratios, one risk score.

Frequently asked questions

As a rough guide, above 40% counts as solid and below 20% as low. The industry-typical norm differs substantially between, e.g., banks and industrial companies.
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Not investment advice. This explanation is for informational purposes only and does not constitute a recommendation to buy or sell securities.

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