How to Calculate Equity to Total Capitalization

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.