Equity Ratio (EKQ) Explained
What Is the Equity Ratio?
The equity ratio (EKQ) indicates the proportion of a company's equity to its total capital (balance sheet total). It's a key measure of a company's financial stability and independence. A company is considered soundly financed when the equity ratio is greater than 30%.
Calculation
Finanzoo calculates the score by relating equity to total capital. Maximum points are awarded from values of 50% upward. Overall, the equity ratio enters the Finanzoo F-Score with a weight of 20%.
| EKQ < 20% | Critical – high dependency on debt |
| EKQ 20 – 30% | Below average |
| EKQ 30 – 50% | Soundly financed |
| EKQ > 50% | Very stable, low dependency |
Typical Equity Positions
- Subscribed capital
- Capital reserves
- Retained earnings
- Profit/loss carryforward
- Net income/net loss for the year
Advantages of a High Equity Ratio
A high equity ratio indicates low dependency of the company on creditors. Interest and repayment obligations are low, and more free funds are available for distributions. A high equity ratio also reduces the risk of total default, as losses can be compensated over a longer period. Rating agencies tend to view a high equity ratio favorably.
Advantages of a Low Equity Ratio (Leverage Effect)
A low equity ratio can increase the return on equity through the leverage effect – provided that the interest on debt capital is below the overall return on capital. In low interest rate environments this can be attractive, but carries substantial risks when interest rates rise.
Increasing the Equity Ratio
The equity ratio can be improved on the asset side through capital release measures (e.g. factoring) and on the liabilities side through capital increases or retained earnings.
Discussion
Comparability across industries is limited: banks and insurers structurally show low equity ratios. Finanzoo does not apply an industry bonus when calculating the F-Score and reports the value as calculated from the balance sheet.