The assets-to-equity ratio measures a firm's total assets in relation to the total stockholder equity. Because assets are equal to liabilities and stockholders equity, the assets-to-equity ratio is an indirect measure of a firm's liabilities. By analyzing this ratio, you can tell to what extent a business is financed by equity or debt.
Analyzing Assets to Equity
The assets-to-equity ratio is simply calculated by dividing total assets by total shareholder equity. For example, a business with $100,000 in assets and $75,000 in equity would have an assets to equity ratio of 1.33. In a firm that relies only on stockholder equity for funding, and does not take on debt, the ratio will always equal 1 because the stockholder equity and assets will always be equal. But so long as a firm has debt, the ratio will always exceed 1. The higher the ratio is, the greater the firm's debt. There is no ideal ratio to aim for, as all firms have a different tolerance for debt.