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The shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets.

The ratio is expressed as a percentage and is calculated by dividing a company’s total shareholder equity by its total assets.

A company’s total shareholder equity is the combined money its shareholders have invested, as well as any subsequent investments, plus its retained earnings. You can find all of these on a company’s balance sheet.

Suppose ABC Company’s balance sheet reveals $25 million in total shareholder equity and $45 million in total assets. Its shareholder equity ratio is almost 56 percent.

A high ratio means shareholders can expect larger liquidation returns. It also shows that investors are willing to buy the company’s stock, which could entice others to do the same.

A low ratio means shareholders can expect smaller liquidation returns. It could also indicate more of the company’s financing has come from debt. A good shareholder equity ratio also depends upon the performance of other companies in the same industry.

Also note that if a company declares bankruptcy, its debt holders receive payment before shareholders. 

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