The Equity to Assets ratio is used to determine the financial health and long-term profitability of a corporation. It is often used by investors to determine whether the corporation’s shares are a safe investment and it is a measure of solvency. Equity to Assets ratio assesses the degree of financial independence, i.e. what percentage of total company’s assets is financed by Equity. A high ratio means that the corporation is mostly owned by its shareholders and can pay less interest for debt, while a low ratio means that the corporation is likely burdened with high debts and it is difficult for a company to obtain loans from banks and other financial institutions. A low Equity ratio is not necessarily bad, as it can contribute to an increase in the Return on Equity (as long as the company earns a rate of return on assets that is greater than the interest rate paid to creditors).
