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When a company decides to raise money by selling stock, it holds an Initial Public Offering or IPO. The company can then use that cash to fund its operations. One way to determine how well a company employs its stockholder's investments is by calculating the company's equity ratio. To calculate an equity ratio, you divide a company's total assets by its total equity. A corporation's total equity is the sum of its retained earnings, which is unspent cash sitting in a bank account, and the amount of money received from investors through sales of stock.
Total assets are everything the company owns. It can include cash, cash equivalents such as short-term notes and also anything that's a longer term asset, such as a building or intellectual property. So, to calculate the equity ratio, you divide total assets in cell B5 by total equity in cell B6, and there you have the ratio. Now, a low equity ratio isn't necessarily a bad thing, but a decreasing equity ratio could indicate that a company's sales, which generate cash, aren't going well.
The equity ratio provides an insight into the ability of a company to generate return on its shareholder's investments. Sudden changes in a company's assets such as through sales of product lines, buildings, purchases of buildings and so on, can distort this value in the short term. So, be sure to consider the company's equity ratio over time before drawing any conclusions.
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