Assets to Equity Ratio Formula & Explanation

What is the Assets to Equity Ratio

Assets to equity ratio is a financial ratio that measures the company’s assets financed by the investors’ equity. The value of the assets to equity ratio reflects how much the company uses the owner’s equity to acquire assets.

The assets to equity ratio value of 1.00 means that total assets and total equity are equal to each other, implying that there are no liabilities. In the same way, when the assets to equity ratio value are greater than 1.00 means the company’s assets are more than the owner’s equity which means the company acquires those assets by debt.

In contrast, when the value is less than 1.00 means the company’s assets are less than the owner’s equity, which indicates the company likely to acquire those assets with equity. However, it depends, you need to check the financial statement again to make sure they are all from debt.

Assets to Equity Ratio Formula

The assets to equity ratio can be calculated by dividing the total assets by the company’s equity, or the following assets to equity ratio formula:

A/E ratio = Total Assets / Equity

This is the reason why it is also known as the total assets to equity ratio. (Also known as financial leverage or equity multiplier).

For example, the company has total assets of $1 million and the owner’s equity is $500k.

• A/E ratio = 1,000,000 / 500,000 = 2 times

From the example, the company’s assets in a given year are 2 times greater than the owner’s equity.

Frequently Asked Questions