Equity to Asset Ratio
How is it calculated?
Equity to Asset Ratio = Equity / Total Assets
Goal of the Ratio
The goal of this ratio is to identify what percentage of a businesses total assets are financed with equity versus debt.
When is it used?
Equity to Asset Ratio can be used in all situations.
Rules of Thumb
Higher is Better - For a bank, the risk is lower when a borrower’s Equity to Asset Ratio increases. As the Equity to Asset Ratio increases, things like collateral position improve as well a businesses ability to weather a downturn in their business. A business with a larger equity position, can sustain losses for longer than a business with less equity because the business with the higher equity position essentially has a longer wick on the candle to burn.
Please note all ratios should be viewed in relation to industry norms to determine overall adequacy.
What changes in the ratio could mean:
-
Some example reasons why Equity to Asset Ratio can change:
- Profitability
- Contributions/Distributions
- Large expansions that are heavily debt financed
Other Relevant Terms
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