The Equity-to-Capital Ratio measures the proportion of a company’s total capital. It shows how much of the business is financed by equity relative to debt. Equity-to-Capital Ratio = Total Equity / (Total Debt + Total Equity)High E/C → Company is conservatively financed, relying more on equity than debt. This means lower financial risk but typically a higher overall cost of capital (since equity is more expensive). Low E/C → Company relies more heavily on debt, which lowers the cost of capital but increases financial risk.Equity Used: Book vs. Market: Book Equity is typically used in credit analysis, bank covenants, and rating agency metrics, since it reflects the accounting capital available to absorb losses. Market Equity is used in valuation, investment analysis, and is used in valuation and WACC calculations, since it reflects investors’ current perception of the company’s equity value and thus the true cost of capital. 👉 Analysts should be explicit about whether book or market equity is used, as the ratio can look very different depending on the choice.
Learn Equity-to-Capital Ratio with interactive examples and practice exercises in our Performance Metrics module.
This interactive learning module helps you understand Equity-to-Capital Ratio through hands-on practice and real-world examples.