Loan capital and equity ratio
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To calculate the total indebtedness of a company, the total shareholder equity can be compared with the loan capital that serves to finance the company’s assets. Financial institutions use this financial ratio to estimate the ability of a company to repay its debts. A higher ratio means a more precarious situation for the company, especially in the eventuality of an increase in interest rates.
A ratio higher than 1 indicates that the assets are financed mainly by loans. If this financial ratio is lower than 1, the company is mainly financed by shareholders’ equity.
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