Table of Contents
What is the Equity Ratio?
The equity ratio is the ratio of a company's equity to its total capital. A higher equity ratio means more conservative financing, while a lower equity ratio indicates higher leverage. Financial institutions usually have lower equity ratios due to their business models. Companies with low equity ratios face higher risks of being unable to pay interest on debt, especially those with low margins or cyclical business models.
How is the Equity Ratio Calculated?
Equity is divided by total capital. Total capital is made up of debt and equity. According to the Levermann strategy, the corresponding figures from the last completed financial year are used for the calculation.
Example Calculation: Using Procter & Gamble's equity ratio as of September 13, 2024.
According to the Levermann strategy, the following points are awarded for the equity ratio (financials excluded):
What Does the Equity Ratio Indicate?
The equity ratio indicates a company's creditworthiness. Companies with high equity ratios have advantages during economic downturns since equity doesn't have a maturity date and there's no obligation to pay dividends.
How High Should the Equity Ratio Be?
The suitable equity ratio depends on the company's business model. Companies with fluctuating profits should aim for higher equity ratios as a buffer for tough times. Established companies like Procter & Gamble can afford lower equity ratios. Banks are an exception due to their different financing structures.
Top 10 stocks with the highest equity ratio worldwide
The following table shows the top 10 mid and large cap stocks with a high equity ratio and a return on equity of at least 25 percent.
| Stock | Equity ratio | Return on equity |
| Black Stone Minerals LP | 96.09% | 34.71% |
| Texas Pacific Land Trust | 89.47% | 38.88% |
| Roivant Sciences | 89.28% | 67.44% |
| Mueller Industries, Inc. | 85.48% | 25.56% |
| Auto Trader Group | 83.94% | 46.51% |
| Rambus Inc. | 82.51% | 32.16% |
| Lattice Semiconductor Corporation | 82.30% | 37.44% |
| Kweichow Moutai | 82.02% | 33.41% |
| EMS-CHEMIE | 81.61% | 25.87% |
| Evolution AB | 80.55% | 27.56% |
