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Equity efficiency is calculated as:
=
Total Assets
Total Equity
(x $100 for descriptive purposes)
For Sample Inc.'s trailing four quarters the company had $182 of
assets for every $100 of equity. Given that assets = equity + debt,
the company had $82 of debt for every $100 of equity – virtually
unchanged from the start of the period when there was $86 of
debt for every $100 of equity.
Pros & Cons
Generally growth-oriented investors experience mixed feelings
about the level of a company's Equity Efficiency.
For example, these investors generally prefer a “prudently-high”
value for Equity Efficiency because it contributes to a high value
for Return on Equity and for the Sustainable Growth Rate.
Accordingly, growth-oriented investors would be looking for an
Equity Efficiency Profile that is at a high value with a flat or rising
trajectory.
Possible reference points for defining a “prudently-high” value are
the historical values for the company's Equity Efficiency; and, the
Equity Efficiency values achieved by “comparable” firms.
Finding Stocks in the “Buy Zone”
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