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What you will learn
- Calculate the equity ratio with a stated definition and balance-sheet date.
- See how borrowing changes the percentage through total assets.
- Separate capital structure from cash and the shares’ market value.
SEK 40,000 out of SEK 100,000 gives 40%
The fictional business in our opening position has assets of SEK 100,000 and liabilities of SEK 60,000. Equity is the SEK 40,000 difference. With no adjustments required in the model, the equity ratio is 40,000 / 100,000 × 100 = 40%. The balance agrees: 100,000 = 60,000 + 40,000.
The denominator is the entire asset total, not just cash or the business’s revenue. The numerator is the company’s accounting equity under the selected definition, rather than what its shares currently cost on the stock market. A change in the share price should therefore not simply be inserted into this calculation.
If the table does not fit, scroll it sideways.
| Item | Before loan | After loan |
|---|---|---|
| Assets | SEK 100,000 | SEK 150,000 |
| Liabilities | SEK 60,000 | SEK 110,000 |
| Equity | SEK 40,000 | SEK 40,000 |
| Equity ratio | 40% | approximately 26.67% |
The loan changes the denominator without changing equity
The business then takes a new SEK 50,000 loan and keeps the proceeds in cash. Assets increase to SEK 150,000 and liabilities to SEK 110,000. Equity remains SEK 40,000. The equity ratio becomes 40,000 / 150,000, approximately 26.67%.
The percentage falls even though the equity amount has not decreased. A larger asset total is now financed by more debt. At the same time today’s cash balance is higher. This shows why a capital-structure measure and available payment funds must be kept separate; they can move in different directions following the same event.
A separate loss reduces both assets and equity
Return to the opening position before the new loan. Now assume instead a SEK 10,000 loss that reduces assets by the same amount and leaves liabilities unchanged. Assets are then SEK 90,000, liabilities SEK 60,000 and equity SEK 30,000. The equity ratio is 30,000 / 90,000, approximately 33.33%.
This is a separate path from the same starting position, rather than the next step after borrowing. The loss reduces equity, while the previous section’s loan changed financing and total assets. Keeping the scenarios separate lets you explain the cause of each movement instead of merely comparing two percentages.
Read the definition without assuming a universal target
Adjusted equity can differ from the equity amount shown on a single line in a report. If untaxed reserves or other adjustments exist, the definition must be handled before comparing the figure with our simplified example. Such items are explicitly absent here, and we calculate no current tax adjustment.
One equity ratio does not determine whether a business is a good investment or can pay an invoice next week. Its operations, asset composition and debt terms also matter. Record the balance-sheet date and definition, check identity with Investiq’s company-search guide, and read the company’s report. This exercise provides no general target percentage or special equity-ratio feature in the app.
Try it yourself
Another fictional business has assets of SEK 80,000 and liabilities of SEK 50,000. The model has no reserves or equity adjustments. What are equity and the equity ratio?
Show the solution and explanation
Equity is SEK 30,000 and the equity ratio is 37.5%.
80,000 − 50,000 = SEK 30,000. Using the same definition as above gives 30,000 / 80,000 × 100 = 37.5%. No share prices or sales amounts enter the fraction.
Check your understanding
Did equity fall when our company took a new loan?
No. It stayed at SEK 40,000 while total assets increased.
Does the equity ratio show the amount in the bank?
No. It describes a capital-structure relationship rather than a bank balance.
Practise with virtual money
Try what you just learned in a practice portfolio with virtual money. You don't deposit any real money.
How the practice portfolio worksKeep learning and practising
More lessons on this topic
Read company statements
Sources and examples
- Statistics Sweden: definitions of gross margin, operating margin and adjusted-equity ratio
- SEC: assets, liabilities, equity and receivables
The sources support the factual explanations. Calculations and exercises were created for this lesson. Amounts and price changes are invented unless stated otherwise.
This material is educational and does not recommend securities to buy. A simulated result does not guarantee a future result.
