In business administration and accounting, equity capital (patrimonio netto) represents the portion of a company's assets that
belongs to the owners or shareholders after all liabilities have been deducted.
As a key balance sheet item, it forms the basis for assessing the financial substance
and stability of a company.
Significance of equity
Equity plays a decisive role in many contexts:
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Financial stability:
A high equity ratio is considered a sign of financial strength, as the company is less
dependent on external capital (e.g. bank loans).
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Creditworthiness:
Banks and investors often evaluate companies based on their equity ratio – the ratio
of equity to total capital. A high value improves creditworthiness.
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Risk buffer:
In the event of economic difficulties, losses are initially covered by equity before
lenders are affected.
What does equity consist of?
Equity consists of various balance sheet components that reflect both the funds
contributed by the owners and the profits retained by the company. Examples include:
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Shareholders’ capital shares:
The share capital contributed by the shareholders at the time of formation or a
capital increase.
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Retained earnings:
Profits retained from previous financial years that remain in the company to finance
investments or cushion future losses.
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Net profit or net loss for the year:
The profit or loss for the current financial year is added to or deducted from equity
and reflects the current business performance.
These components provide a comprehensive overview of how much capital the owners
have contributed, what funds remain in the company and how profits are used.
Equity in the context of the balance sheet
In the balance sheet, equity is reported on the liabilities side, alongside borrowed
capital. It shows how the company’s assets are financed – through the owners’ own
funds or through obligations to third parties.
A high equity ratio strengthens a company’s economic resilience, as more of its own
funds are available to cover risks. A low equity ratio, on the other hand, indicates a
higher dependence on debt and potentially greater risks.
Important equity ratios
The following ratios are particularly relevant for assessing the financial stability and
structure of a company:
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Equity ratio:
Equity / Total capital × 100
Measures the proportion of equity in relation to total capital. A higher ratio indicates
greater independence from borrowed capital.
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Debt-to-equity ratio:
Debt / Equity
Shows the ratio of debt to equity. A low value indicates low indebtedness.
-
Return on equity (ROE):
Net income / Equity × 100
Measures the profitability of equity and indicates how efficiently the owners’ funds
are being used.
Conclusion
Equity (patrimonio netto) is a key indicator of a company’s financial health.
It shows what proportion of the assets belong to the owners, how stable the financing
structure is and how efficiently the capital is being used. Key figures such as the
equity ratio, debt ratio and ROE provide entrepreneurs and investors with valuable
information for decision-making in the areas of financing, investment and risk
management.