IGCSE/GCSE/O & A Level/IB/University Student Forum

Qualification => Subject Doubts => GCE AS & A2 Level => Commerce => Topic started by: avin on April 30, 2011, 11:25:57 am

Title: Ratio analysis
Post by: avin on April 30, 2011, 11:25:57 am

Anyone know what will happen to the company having a high equity ratio?

This will help me in the interpretation of ratio.

Hope anyone cab explain to me.

Thanks.

Title: Re: Ratio analysis
Post by: Dasith on April 30, 2011, 01:50:15 pm

Equity ratio means (usually) ---
Equity / Capital:Companies /firms assets

ad:

#High equity means, most financing is done by owners which is good for the firm , as it is less risky than borrowing money.
#High equity may also provide better returns as the firm could invest in any activity(which may be riskey,but provde high return) as it need not be paid back.

this:

#but however its a disadvantage for shareholders or owners as there is less return on their investment, because they have to invest a very large sum of money.Where as another company would gain the same return with less investments from owners(low equity) as long as the short term liabilities(creditors) could be paid from profits & there is enough money to pay off owners.

Title: Re: Ratio analysis
Post by: avin on April 30, 2011, 01:59:14 pm

Thanks Dasith for the explanation.

But Is it means the money from the equity is through issues of shares?

What do you mean by 'Where as another company would gain the same return with less investments from owners(low equity) as long as the short term liabilities(creditors) could be paid from profits & there is enough money to pay off owners.'?


Who is the owner, u mean?

Title: Re: Ratio analysis
Post by: Dasith on April 30, 2011, 02:13:46 pm

yea the equity is share holders funds/ share capital simply

What i meant by "another company......."
is another company with same Total asset value as this company(but with high equity), the owners(of this company) will find that they earn a higher return on their investment as the hav to invest little compared to assets the business hav , but they will recieve a higher return if the short term liabilities could be paid(short term liabilities are not included in equity).
But
on the other hand the other company owners (high equity) will have to invest more.& if both companies recieve same return. This company owners would hav less return on their investment .

i.e becose return is being devided by lage capital /shares

hope you get it ;)

Title: Re: Ratio analysis
Post by: avin on April 30, 2011, 04:58:48 pm

Thanks Daisth.


Hope i dont spell you name wrongly.

Title: Re: Ratio analysis
Post by: Dasith on May 01, 2011, 02:38:23 am

well u did spell it wring, ;)