How to Configure Equity to Assets Ratio
Original post by Christopher Carter of Demand Media
A company’s equity to asset ratio exists as a measure of solvency that indicates the company’s ability to pay debts if the business has to immediately terminate, as explained by the Michigan State University website. Also, the equity to asset ratio illustrates the amount of a company’s assets that are financed by the owner’s investment in the business. To configure equity to assets, divide stockholders’ equity or net worth by a company’s total assets.
Calculate a company’s total assets. Add all current assets that the company will convert to cash within one year such as accounts receivable, prepaid rent and cash. Tally the company’s total long-term assets that the company will convert to cash in over one year, like notes receivable, land and equipment. Add total current assets with total long-term assets to determine a company’s total assets. For example, if a company has total current assets of $100,000 and total long-term assets of $150,000, the company has total assets of $250,000
Compute stockholders’ equity. A company can subtract total liabilities from total assets to determine stockholders’ equity. For instance, a company with $250,000 in total assets and $150,000 in total liabilities has stockholders’ equity of $100,000.
Divide stockholders’ equity by total assets. Assume a company has stockholders’ equity of $100,000 and total assets of $250,000. In this scenario, a company’s equity to asset ratio is .40, or 40 percent.
- U.S. Business Reporter: Understanding Banking Ratios
- University of Notre Dame: Financial Ratio Analysis
- Michigan State University: Equity to Asset Ratio
About the Author
Christopher Carter loves writing business, health and sports articles. He enjoys finding ways to communicate important information in a meaningful way to others. Carter earned his Bachelor of Science in accounting from Eastern Illinois University.