Business, Legal & Accounting Glossary
The asset/equity ratio indicates the relationship of the total assets of the firm to the part-owned by shareholders (aka, the owner’s equity). This ratio is an indicator of the company’s leverage (debt) used to finance the firm.
The asset/equity ratio shows the relationship of the total assets of the firm to the portion owned by shareholders, also known as owners equity. The asset/equity ratio indicates a company’s leverage, the amount of debt used to finance the firm. A company’s asset/equity ratio depends importantly on the industry in which it operates, its size, economic conditions, and other factors. There is no ideal asset/equity ratio. A relatively high asset/equity ratio may indicate the company has taken on substantial debt merely to remain in business. But a high asset/equity ratio can also point to a company that is wisely “trading on the equity.” In other words, there is a high asset/equity ratio because the return on borrowed capital exceeds the cost of that capital. At some point, however, an asset/equity ratio can reach unsustainable levels, as the additional debt ratchets up interest costs and the deteriorating financial position puts the firm in jeopardy. By the same token, a low asset/equity ratio can indicate a strong firm that needs no debt, or an overly conservative company, foolishly foregoing business opportunities.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Asset/Equity Ratio are sourced/syndicated and enhanced from:
This glossary post was last updated: 4th April, 2020 | 4 Views.