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Simple English definitions for legal terms
equity ratio
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A quick definition of equity ratio:
Equity ratio: The equity ratio is a way to measure how much of a property or company belongs to the owner or shareholders. It is calculated by dividing the amount of money the owner or shareholders have invested (called equity) by the total value of the property or company. For example, if someone buys a house for $100,000 and puts down $20,000 of their own money, their equity ratio would be 20%. This helps people understand how much ownership they have and how much they owe to others.
A more thorough explanation:
The equity ratio is a financial metric that measures the relationship between a company's shareholder equity and its total equity. It is expressed as a percentage and is used to evaluate a company's financial health and solvency.
A company has $500,000 in shareholder equity and $1,000,000 in total equity. The equity ratio is calculated as follows:
Equity Ratio = Shareholder Equity / Total Equity
Equity Ratio = $500,000 / $1,000,000
Equity Ratio = 0.5 or 50%
This means that 50% of the company's total equity is owned by its shareholders.
A homebuyer wants to purchase a property worth $200,000. They have $40,000 in savings for a down payment. The equity ratio is calculated as follows:
Equity Ratio = Down Payment / Property Value
Equity Ratio = $40,000 / $200,000
Equity Ratio = 0.2 or 20%
This means that the homebuyer's equity in the property is 20% and they will need to finance the remaining 80% through a mortgage.
Overall, the equity ratio is an important financial metric that helps investors and lenders evaluate a company's financial health and solvency. A higher equity ratio indicates that a company has a stronger financial position and is less reliant on debt financing.