Why banks look at your equity ratio
What the equity ratio tells you and how to calculate it.
Create your financial plan
What the equity ratio tells you and how to calculate it.
Create your financial planThe equity ratio shows what share of a company's assets is financed by equity rather than debt. It relates equity to total assets, the entire capital employed. The higher the ratio, the more the company stands on its own and the less it depends on lenders.
For banks it is a key creditworthiness factor. Equity is the buffer that absorbs losses before creditors are affected. A high ratio means lower default risk, a better rating, and usually better terms.
The equity ratio can be read straight off the balance sheet. Equity and debt together make up total assets, and equity is then set in relation to it:
| Equity | 400,000 € |
| + Debt | 1,200,000 € |
| = Total assets | 1,600,000 € |
| Equity ratio | 25% |
400,000 € of equity divided by 1,600,000 € of total assets gives an equity ratio of 25 percent. The scale shows where that value sits:
An equity ratio of 25 percent is solid and only just below the German SME average of around 30 percent. As a rule of thumb, above 30 percent is good and below 10 percent becomes critical. The benchmarks vary by sector: capital-intensive industrial firms tend to sit higher, retail often lower.
From your inputs, Planvik builds a full projected balance sheet and reports the equity ratio for every plan year, alongside the other metrics banks review. Bank-ready as Excel.
Create your financial planThe equity ratio has a counterpart: gearing, the ratio of debt to equity. Both describe the same capital structure from two directions. An equity ratio of 25 percent equals a gearing of 300 percent, three euros of debt per euro of equity. Banks watch both, because they show how much room is left for further borrowing.
The ratio rises in two ways: more equity or a smaller balance sheet. The most sustainable is to retain profits in the company rather than distribute them. Shareholder contributions also raise equity directly. On the other side, paying down liabilities or a leaner balance sheet lifts the ratio, for example through lower inventories or the sale of non-essential assets.
In credit rating, the equity ratio is one of the most heavily weighted factors. It shows whether a company can survive a downturn or losses from its own substance without becoming insolvent right away. Together with the DSCR, which measures ongoing debt service capacity, it forms the picture that decides the lending decision.
As a rule of thumb, a ratio above 30 percent is considered good. The German SME average is around 30 percent, and below 10 percent it becomes critical. The figures depend heavily on the sector, though.
For a GmbH: subscribed capital (share capital), capital and revenue reserves, retained earnings and net income for the year. Shareholder loans do not count unless they are explicitly subordinated.
Yes. If losses exceed the existing equity, it turns negative, known as balance-sheet over-indebtedness. That is a serious warning sign and can become relevant under insolvency law.
Both measure the same capital structure. The equity ratio as a share of total capital, gearing as the ratio of debt to equity. Which one is used is a matter of convention.
In principle no, they are debt. But banks often treat them as economic equity when a subordination agreement is in place, which improves the economic equity ratio.
Planvik builds a full projected balance sheet and reports the equity ratio for every plan year automatically, including its development over the entire projection period.