Shareholder Equity Ratio

Companies raise money in two fundamental ways. One involves selling equity. The company's founders find investors and give them part ownership in the company in exchange for cash. Then they use that cash to buy the things needed to run a business: factories, machines, posters with inspirational phrases printed over pictures of kittens, etc.

The other path to raising money uses debt. The company borrows the money it needs for factories and cat posters.

Equity is nice, because you don't have to pay the money back. However, there's a downside. Having all these other owners giving suggestions and calling you all the time can get annoying. But they make their money when the value of the company goes up. You don't have to send them regular checks (at least, not until you start paying dividends).

With debt, you have regular payments of interest and principal. It's a more expensive way to raise funds.

The shareholder equity ratio measures how much of the company's assets were purchased using equity. By extension, you can use this figure to deduce how much of the company was financed using debt. So...the shareholder equity ratio gives a good look at the equity/debt balance of a company. Also, if you're someone who has equity in the company, it suggests how much of the firm's assets would generate cash for you, in a situation where a liquidation might become necessary.