How do I calculate the equity ratio

Calculate the equity ratio

Important key figure in terms of financing and security

In the media, people often speak of the equity share, and that applies to the economy as a whole. What is usually meant is that the companies have too little equity, which represents a considerable risk if the next economic crisis comes and sales decline. Because then the dependency is all the greater.

Calculation of the equity ratio (or equity ratio)

The equity share is calculated quickly and easily and represents another key figure from the area of ​​security in the context of financing. It is generally recommended that the equity share should be at least 20 percent. If the rate is lower, you run the risk of getting into financial difficulties.

The calculation is carried out according to the following scheme:

Equity share = (equity / total capital) * 100

So the amount of equity is compared to the amount of total capital that is available to the company.

Assuming equity of EUR 200,000.00 is shown in the balance sheet and the balance sheet total is one million, then the calculation is

200.000 / 1.000.000 * 100 = 20 %

What does the equity ratio mean in practice?

If you own a very high share of equity, then you are not exposed to the risk of the financier turning the company off, even in the event of a crisis. With low equity coverage and thus high dependency, the danger is already there. On the other hand, too much equity coverage is an economic problem because you then achieve weaker values ​​elsewhere, for example in return on equity.

Conversely, the credit rating is very high and if you have a new business idea, you will hardly have any problems getting money from the bank or finding an investor. Therefore, the share of equity is very important for the statement about the company itself in terms of financing and, above all, its security in financial terms - all the more since there are many companies that can hardly have the necessary equity and therefore are very dependent on donors.

The issue of equity capital is therefore also known to people who otherwise have nothing to do with these financial key figures, because banking institutions have repeatedly criticized the lack of equity capital. Since banks lend large sums of money in the form of loans and other financing options, there is no protection with low own funds, even if you know about the problem. The global financial crisis revealed the problem even more and so the issue of equity capital was so big that many noticed it - after all, it was also about issues such as the security of savings deposits or completed loan payments.