Ratio of the pre-tax profit generated during a period (yield before taxes) to the balance sheet equity of a company (net earnings of a company divided by its assets; it measures how economically and profitably the firm is using its capital). – Smaller companies run as sole proprietorships or partnerships, as well as private banks, often have a very high equity ratio. In most cases, however, this is due to a very low level of equity on the balance sheet. For tax reasons, this is often kept very low and only represents part of the available liable funds. This is because there is scope for transferring assets – such as real estate – to private or business assets: Real estate – to private assets or to business assets. If off-balance sheet assets were included, total assets and equity would therefore increase, and the equity ratio would therefore decrease. – The ECR is therefore less suitable for assessing the earnings situation of a company; the return on sales is the more convincing ratio. – Product of earnings efficiency and operating efficiency (operating return on equity). This shows the strength of a bank in its business area (line of business), for example, excluding risk provisioning. – It should be emphasized that these (and other) ratios provide information on the earnings in past periods or on the current earnings of a company and only say something about future earnings power to a limited extent. – See asset productivity, cost/income ratio, contribution margin, efficiency, cost efficiency, run rate, return on sales. – Cf. Deutsche Bundesbank Monthly Report, January 2010, p. 20 f. (return on equity compared with return on sales; references).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
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