Equity ratio
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The equity ratio is a business management code on the capital structure, which shows the share of equity in total capital of a company. It is calculated as follows:
The counterpart to equity ratio is the debt ratio.
As part of the annual statement, the equity ratio is part of the financial analysis and to the financing analysis. I.d.R. It does not touch the balance sheet equity, but the economic equity. Based on the reported equity additions and / or deductions can be made here. This must be taken into account in the denominator then also.
The higher the equity ratio, the more solid a company is financed, the lower the risk of insolvency of the company. Equity serves as a safety cushion to cover losses and to survive bad phases. In insolvency prediction, the equity ratio is therefore a key determinant of both the risk of insolvency, the associated credit risk and the interest rates paid by the company or credit spreads.
The amount of the equity ratio is a key driver of return on equity or return on investment of an investor. The increase in the gearing ratio and thus the reduction in the equity ratio leads to an increase in return on equity, provided that the borrowing costs are below the return on assets. This effect is called leverage or leverage effect.
- 2.1 Offsetting of assets and liabilities
- 2.2 Consideration of the balance sheet unrecognized assets and liabilities
Calculation of core equity
The term equity is not used uniformly in content and scope. However, equity typically has the following characteristics:
- It does not create any ongoing payment obligations of the Company, which could cause a failure.
- There can be no due dates, time limits or repayment obligations.
- It participates in corporate losses.
- It provides a safety cushion for creditors of the company, as far as absorb corporate losses and thereby avoid bankruptcies.
- It represents a permanent position in the capital structure of the company
Starting point in determining the equity in the broader sense (hereinafter referred to as own funds ), the above narrow definition of capital (so-called balance sheet equity, because it has been determined based on the balance sheet). In addition to this narrow concept of equity in the literature certain other liability items are included in own funds and certain asset items deducted from equity.
Attribution of further liability positions to balance sheet equity
When issued, and additional liability positions as typical worked out for the equity membership criteria must be observed. This is especially true for corporations, since these liability for creditors generally is limited to equity. In commercial partnerships, however, on the goods listed in the balance sheet equity is also also the personal assets of the general partners as more unlimited liability grounded. The accounting treatment of equity is therefore always right depending on shape.
In the literature sometimes Liabilities to affiliated and associated companies / payable to shareholders and corporate bodies / payable to Silent partners are in addition to balance sheet equity attributed to shareholders' equity, which is partially differentiated also according to the residual maturity. The addition of this position to balance sheet equity is based on the assumption that the respective closely associated with the company creditors would forego necessary to their claims against the company due to either explicit contractual arrangements, under general statutory provisions or of its own economic interest to the insolvency prevent. So are especially for small and medium-sized companies often further economic integration between the shareholders and the company before ( management by the owner, employment of other family members, hiring of land and buildings by the owner family ).
Furthermore, in addition to balance sheet equity, the so-called quasi-equity funds ( special items with an equity portion, activated grants) are attributed to the adjusted equity. This is to " reserves from not taxed profits to be resolved according to the provisions of the tax laws." Typically, these positions are at least in part (1- tax rate) attributable to the equity in the determination of equity. If appropriate, existing tax losses can be taken into account, which reduce the tax burden of the company at the resolution of the equity-like agents.
Release of hidden reserves
In the German trade balance assets can be valued more than the amortized acquisition or production costs. However, for the purposes of financial statement analysis, it would be desirable to acquire the assets with fair values. These are often higher than cost-based valuations. If the analyst has the necessary information, may here be made to adapt and hidden reserves are dissolved. However, outsiders have i.d.R. do not have such information, so this is particularly relevant for internal analysis. Non-capitalized assets may be added to the capital, where such information to be disclosed in the notes and these are regarded as recoverable.
Reduction of shareholders' equity to asset items
The measures proposed in the literature in the cleanup of the balance sheet equity reductions to certain asset items ( direct offsets ) are aimed at the balance sheet assets of the company to be considered " no value " to correct prestigious asset positions and to ensure comparability with the balance sheets of other companies on, have waived the activation of the respective positions, where the use of ID card or Outline option rights is based mostly. Often, however, this approach is neither appropriate nor economically imperative to ensure comparability with the financial statements of other enterprises. The measures proposed in the literature, netting for example, relate to the following items:
- Unpaid contributions to subscribed capital: that participants have made for their subscribed capital shares no deposits in the company, ie the company, for example, provided cash or in kind resources in the promised amount available, so the company has a claim against the shareholders in the amount of outstanding deposits. A netting of deposits to equity implied that the requirements of the company to the owners of no value, ie uncollectible were what in general but might not be true. Also for " precautionary reasons ", this procedure would be unjustifiable, because then would also have significant reductions in all other assets of the company are made. If such items are deducted from equity, their worthlessness must be proven.
- Before the entry into force of the Accounting Law Modernization Act ( BilMoG) were in the trade balance so-called accounting aids are selectively activated. This related expenses for the initiation and expansion of the business, deferred taxes and Coenenberg also the derivative goodwill. Mainly for reasons of comparability usually an elimination has been proposed here in the literature. This reason has ceased to exist after the entry into force of the BilMoG in 2009 for start-up expenses (now approach ban) and goodwill (recognition bid ) so that the comparability in this respect requires no more elimination. Exists for deferred taxes, however, still an option to recognize as now "full " property. Depending on the individual case, elimination of goodwill, however, still be considered if this is not deemed recoverable.
- Loans to shareholders and shareholder bodies: For economic basis of this Saldierungsvorschlags see above the comments on " outstanding contributions ".
- Treasury shares: Buy a company own equity shares of the company's previous owners back, it acquires an insubstantial in the net consideration receivable from themselves ( solve it alleges, it shall pay a sum of money to itself ). From an economic point of purchase of own shares by the company represents a payout of own funds, and offsetting the equity is actually appropriate. On the netting can then be dispensed with if a speedy resale of the acquired own shares is provided to a third party, for example, in connection with employee stock ownership plans or corporate mergers, resulting in a Zurückholung the previously undistributed capital resources.
Determination of the adjusted total assets
Also be made in determining the ratios denominator of the capital ratio, total assets, pruning, analogous to the adjustments in the balance sheet equity. These adjustments again, it is economically possible proper presentation of the financial position and capital structure of the company and to increase the comparability with the financial statements of other enterprises.
Netting of asset and liability positions
If certain assets to equity netted see through top so the balance sheet total decreased by the same amount. In addition, reduces the adjusted balance sheet total if assets with other liability items are recognized as equity. This particularly concerns the frequently proposed in the literature netting in inventories of finished goods and work in process ( active position ) with the payments received ( liability position ): In addition to stocks of not salable products are " finished and unfinished goods and services " in the already invoiced, but not yet formally - legally " impact on sales " have become part services covered. The payments received from these already can be detected either as advance payments on the liabilities side of the balance sheet or disclosed by the inventory of finished goods and finished goods and services are sold. ,
Consideration of the balance sheet unrecognized assets and liabilities
The balance sheet total is extended, off-balance sheet debt-financed assets are taken into account. This applies particularly to " leased " assets. Banks will not usually on the cleanup of the balance sheet total ( off-balance sheet ) lease assets. Rating agencies, however, make extensive adjustments of balances ( and the profit and loss account) to account for assets financed by leasing.