Glossary

What is equity ratio?

What is the equity ratio, really?

Solvency ratio is a key metric that shows what proportion of a company’s assets is financed with equity. It is used to assess the company’s financial stability and its ability to withstand losses.

In short

Get a quick overview.

Solvency ratio is a key metric that shows what proportion of a company’s assets is financed with equity. It is used to assess the company’s financial stability and its ability to withstand losses.

1 The solvency ratio is calculated as: Solvency ratio = (Equity / Assets) × 100 The result is stated as a percentage.

2 A high equity ratio means the company is largely financed by equity, which provides a robust financial position.

3 A company has: Equity: DKK 2m Assets: DKK 5m Equity ratio = (2 / 5) × 100 = 40% The company.

The key angles on the term.

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Calculating the equity ratio

The solvency ratio is calculated as:

Solvency ratio = (Equity / Assets) × 100

The result is stated as a percentage.

Overview

Interpretation

A high equity ratio means the company is largely financed by equity, which provides a robust financial position and lower dependence on external capital (loans).
A low equity ratio shows that the company has a high debt burden and is therefore more vulnerable to interest rate rises and economic fluctuations.
Typically, an equity ratio above 30–40% is considered satisfactory, but this varies greatly depending on the industry and type of business.

Example

A company has:

Equity: DKK 2m
Assets: DKK 5m

Equity ratio = (2 / 5) × 100 = 40%

The company therefore has an equity ratio of 40%, which indicates a sound level of financial strength.

More details

More detail and examples.

The solvency ratio is used to assess how strongly a company is financed with equity and how resilient it is to losses and economic fluctuations. A high equity ratio typically provides greater financial stability and better ability to withstand periods of weak earnings or rising interest rates. The metric is therefore particularly relevant for banks, investors, creditors and company management.

Although a high equity ratio is often seen as positive, the right assessment always depends on the industry, capital requirements and business model. Some companies operate stably with more external capital, while others should have a higher equity share to be robust. The solvency ratio should therefore be read alongside other key metrics such as the liquidity ratio, profitability and debt ratios to provide a fair picture of the company’s financial strength.

Use

The solvency ratio is used by investors, lenders and management to assess the risk of working with the company. Banks often look at the equity ratio when assessing creditworthiness.

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