A company’s equity-to-total capitalization ratio measures the portion of the firm's value that's held by shareholders. In general, a higher equity-to-total capitalization ratio is considered to be less risky because the firm has less debt, or leverage. The normal level of equity to total capitalization, however, differs among industries. Therefore, a company’s equity-to-total capitalization ratio should only be compared across an industry norm.
Shareholder Equity
Shareholder Equity = Assets - Liabilities
Shareholder equity represents the part of a company's assets that belong to its shareholders. It is calculated as the difference between a company's assets and its liabilities. A company's assets, liabilities and shareholder equity are all included on its balance sheet. Financial statements are available online for publicly traded companies on a variety of websites. For example, Disney’s most recent annual report at the time of publication showed that its shareholder equity was $44.958 billion.
Total Capitalization
Total Capitalization = Long-term Debt + Shareholder Equity
A company's total capitalization should not be confused with its market capitalization. Total capitalization is the book value of the company’s total long-term debt and total shareholder equity. These are the total long-term debt and equity values that are reported on the company's balance sheet. In a recent annual report, Disney reported that the company had $12.676 billion in long-term debt. Summing its long-term debt and shareholder equity of $44.958 billion yields a total capitalization of $57.634 billion.
Equity-to-Total Capitalization Ratio
Equity-to-Total Capitalization Ratio = Shareholder Equity/Total Capitalization
Divide the company’s shareholder equity by total capitalization to calculate its equity-to-total capitalization ratio. Using the numbers collected from Disney’s most recent balance sheet, divide its $44.958 billion in shareholder equity by its $57.634 billion in total capitalization. The result is an equity-to-total capitalization ratio of 0.78.
Industry Differences
Disney’s equity-to-total capitalization ratio of 0.78 shows that 78 percent of the company’s value comes from shareholder equity. At the time of publication, Starbucks has a similar equity-to-total capitalization ratio of 0.72. Other industries, however, have different standards for financing and thus different typical equity-to-total capitalization ratios. For example, Exxon-Mobil has a much higher equity-to-total capitalization ratio of 0.91, because the company has a relatively small amount of long-term debt. On the other hand, Citigroup has an equity-to-total capitalization ratio of 0.37. Financial institutions and real estate companies typically have a much higher amount of debt financing than other industries.
References
Writer Bio
Kimberly Goodwin has a Ph.D. in finance from the University of Alabama and is an associate professor of finance and the Parham Bridges Chair of Real Estate at the University of Southern Mississippi. She publishes in top real estate journals as well as on her blog, Your Finance Professor. Goodwin is also the managing editor of the Journal of Housing Research.