Ratio of Equity To Capital Employed - SS2 Accounting Lesson Note

The ratio of equity to capital employed is a financial metric that measures the proportion of a company's equity (the value of its assets minus its liabilities) in relation to its total capital employed (the total funds invested in the business). 

This ratio helps us understand how much of a company's total investment is financed by its equity, as opposed to other sources of funding such as debt or loans. A higher ratio typically indicates that a larger portion of a company's capital is financed by its equity, while a lower ratio suggests that a company has more of its capital financed by other sources such as debt.

The ratio of equity to capital employed is also important for investors and analysts as it helps to assess a company's financial structure and risk profile, and to evaluate its ability to meet its financial obligations. In general, a higher ratio of equity to capital employed is considered favorable, as it indicates a lower level of financial risk and greater financial stability. However, a company may also need to balance the benefits of equity financing against the cost of giving up partial ownership and control of the company.