The Tangible Assets to Equity Ratio shows the relationship of the Total Tangible Assets of the Firm to the portion owned by shareholders and is an indicator of the level of the company’s leverage. It is calculated as Total Tangible Assets divided by Equity. This is measured using the most recent balance sheet available, whether interim or end of year.
There is no ideal Tangible Asset to Equity ratio value but it is valuable in comparing to similar businesses. A relatively high ratio (indicating lots of assets and very little equity) may indicate the company has taken on substantial debt merely to remain its business but a high Asset to Equity ratio can also mean the return on borrowed capital exceeds the cost of that capital.
At some higher levels, however, the ratio can reach unsustainable levels, as the additional debt ratchets up interest costs and the deteriorating financial position puts the firm in jeopardy.
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