A financial ratio that relates assets to owners’ equity. It is a measure of the proportion of total assets financed by a company’s equity. A high ratio signifies a high level of debt (which also means that the debt-to-equity ratio is high, too). For example, in a given year a company with assets and equity worth $1 million and $0.6 million respectively would have an assets-to-equity ratio of:
A/E ratio= $1 million/ $0.6 million = 1.67
This implies that the company’s assets in that year are 1.67 times greater than its equity.
This ratio is a capital structure ratio that shows the extent to which a company depends on debt. That is, an assets-to-equity ratio above 1.0 is an indication it has gone into debt. This ratio is the inverse of the equity funding ratio (equity/assets).
It is known as financial leverage or equity multiplier.
