Equity Ratio for SMEs: A Simple Explanation

The equity ratio is one of the most important financial metrics when it comes to a company’s financial stability. It shows at a glance how solid your company’s financial position is—and how well it could weather a crisis. For small and medium-sized enterprises (SMEs), it is therefore a key management tool.

What is the equity ratio?

The equity ratio shows the proportion of equity in the company’s total capital (balance sheet total). It is expressed as a percentage and answers the question: What portion of your company actually belongs to you—independent of banks, suppliers, or other creditors?

The higher the equity ratio, the less dependent your company is on external financing—and the more stable its position.

Why is the equity ratio so important?

For SMEs, the equity ratio is crucial for several reasons. It is the most important metric for banks during credit assessments—a solid figure significantly improves your financing terms. Additionally, it serves as a buffer during crises: A company with a high equity ratio can weather difficult periods, while a highly leveraged company quickly runs into trouble.

The equity ratio is also a key evaluation criterion for potential investors, successors, or buyers. It signals financial maturity and risk resilience.

Calculating the equity ratio

The calculation is very simple: You divide equity by total assets and multiply the result by 100. You can find equity on the liabilities side of your balance sheet—it includes share capital, reserves, and retained earnings. Total assets are the sum of all assets (or liabilities).

A concrete example

Suppose your company has total assets of 1,000,000 Swiss francs and equity of 350,000 Swiss francs. The equity ratio is then: 350,000 divided by 1,000,000 times 100 equals 35 percent.

This means that 35 percent of your company is financed with its own funds, while 65 percent is covered by debt (loans, supplier invoices, provisions).

What is a good equity ratio?

A healthy equity ratio depends on the industry. For Swiss SMEs, the following guidelines generally apply: Values below 20 percent are considered critical, values between 20 and 40 percent are solid, and anything above 40 percent is considered very good. Higher ratios are expected in manufacturing and skilled trades, while capital-intensive industries such as construction or retail often operate with lower values.

What matters is the trend over time: if the equity ratio is falling steadily, you should take a closer look. A gradual improvement, on the other hand, is a clear sign of financial health.

Improving the Equity Ratio

The equity ratio can be improved in three ways: through higher profits (which are retained rather than distributed), through capital contributions from owners, or by reducing the balance sheet total (for example, by selling non-operational assets or repaying loans). In practice, a combination of these measures is usually most effective.

Findea is happy to assist you in analyzing your equity ratio and identifying targeted measures to strengthen your financial stability.

The complete guide at a glance

This article is part of our comprehensive series on the most important financial ratios for Swiss SMEs. In the complete guide to the 10 most important financial ratios for SMEs, you’ll find all the key figures at a glance—from profitability and liquidity to financing structure.

Formula: Equity Ratio

Equity Ratio (%) = (Equity ÷ Total Assets) × 100

Total Assets = Sum of all assets (or liabilities)