Understanding Shareholders Equity Ratio

The Shareholders Equity Ratio measures how much the company's assets are funded using shareholder's equity instead of debt. This metric also tells how much shareholders claim on the company's assets in a time of liquidation. Shareholders' Equity Ratio is expressed in percentage, and it is calculated as Total Shareholders Fund divided by Total Assets.

The formula to derive Shareholders Equity Ratio



Total Shareholders Equity - Shareholders Equity or Shareholders Fund is the amount of equity that belongs to the company's shareholders. It is found in the Company's Balance Sheet.

Total Assets - Total assets are the total number of assets owned by a person or company. Total assets are reported on a company's balance sheet.

Example of Shareholders Equity Ratio: For the financial year, Gland Pharma reported Total Shareholders Equity as Rs. 5903.24 Cr. and Total Assets as Rs. 6496.87 Cr.
The value as per the formula (Total Shareholders Equity / Total Assets x 100) is calculated as (5903.24 / 6496.87) = 90.86.

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Key Highlights

The shareholder equity ratio shows how much the company's assets are funded using shareholder's equity instead of debt.

It is calculated as Total Shareholders Fund divided by Total Assets

It is convenient to compare companies within the same industry to find better stock. Shareholders Equity Ratio can vary depending on the industry.

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While looking at the Shareholders Equity Ratio, the following points should also take into consideration:

A high Shareholders Equity Ratio is considered good. If the shareholder's equity ratio is 60%, it indicates that sixty percent of the company's assets are acquired by equity and the remaining forty percent by debt.

Low Shareholders Equity Ratio indicates that the company used more debts than equity shares to pay for its assets.

Many investors look for companies with a high shareholder's equity ratio because they are less risky. And a high ratio also indicates how effectively the company funds its assets by issuing equity, and it is financially strong and may hold a long-term solvency position.

If the shareholder equity ratio of the company is 100%, it means almost all of the assets are financed by equity instead of using debt.

The importance of this ratio is it shows how much investors have a claim on assets if the company faces liquidation.

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How to use Shareholder Equity Ratio effectively

Investors should look for a high Shareholders Equity Ratio above 50%. It indicates that a large portion of the company's assets is financed by equity.

While analyzing, the company also looks at its historical data to understand past performance. If the Shareholders equity ratio is increasing year-over-years is a plus point as it indicates that the company is reducing its debt or acquiring more assets using equity capital.

It is convenient to compare companies within the same industry to find better stock. Shareholders Equity Ratio can vary depending on the industry.

To get a more accurate analysis of the company, also use other financial metrics relative to Shareholders Equity Ratio like Debt to Equity Ratio, Assets to Shareholders Equity, Return on Equity (ROE), etc.,

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