Equity shows how much of the company the shareholders have paid for
21 October 2026, 09:42
According to a Creditreform survey reported on 20 October by Handelsblatt, in Germany one company in three among those with no more than 500 employees and €50 million of turnover has equity below 10 per cent of total assets. These are companies of the same size as many Italian businesses, and the measure used by Creditreform can be calculated from two lines of the financial statements.
Equity is read alongside everything the company owns
The balance sheet has two sides. The assets show how the company has used its money: plant, inventory, amounts owed by customers, cash in the bank. The liabilities show where that money came from: the shareholders, the banks, the suppliers, the employees through their severance pay (TFR). The shareholders' share is equity, that is the capital paid in, the reserves and the profits that over the years have not been distributed.
Total liabilities are always equal to total assets. The ratio between equity and that total is called the equity ratio, or financial independence ratio. It shows how much of what the company owns has been paid for with the shareholders' money. The rest has been advanced by others, and sooner or later it has to be repaid.
Losses eat into equity first
Unlike a debt, equity does not have to be repaid by a due date. That is why it is the first part of the liabilities to absorb losses: when a year closes in the red, the debts owed to banks and suppliers do not fall by a single euro, and it is the shareholders' share that goes down. The lower the ratio, the fewer losses the company can withstand before its equity is wiped out. With a ratio of 10 per cent, a loss equal to one tenth of the assets is enough to wipe it out.
Before equity is wiped out, the law requires a step. In limited liability companies, when losses reduce the share capital by more than one third, Article 2482-bis of the Italian Civil Code requires the directors to call a shareholders' meeting «without delay»; for joint-stock companies the same rule is in Article 2446. The law, on the other hand, sets no minimum value for the equity ratio: the figure is judged by comparing it with previous years and with companies in the same sector.
An example. A company that makes aluminium window frames has a turnover of €14 million a year. In its financial statements equity stands at €800,000, less than one tenth of assets of €9 million. A year closed with a loss of €600,000 brings equity down to €200,000, a quarter of what it was.
Share capital, shareholder loans and a single year lead readers astray
The first mistake is to look at share capital instead of equity. A limited liability company can have share capital of €10,000 and equity of millions, made up of profits left in the company; or the opposite, high share capital and lower equity, because losses have already consumed part of it. What counts is the total of item A on the liabilities side, «Equity», which is also found in abridged financial statements.
The second mistake concerns the money the shareholders put into the company. A loan, even an interest-free one, sits among the debts in the financial statements, because it has to be repaid. A capital contribution, on the other hand, sits among the equity reserves. The same sum, coming out of the shareholders' pockets, has two different effects: with the loan the ratio does not rise, because the shareholders' share stays the same; with the contribution it rises.
The third mistake is to read a single year. When the company grows, its assets increase. If the growth is paid for by banks and suppliers and the profits are distributed, equity stays where it is and the ratio falls, even in years that close with a profit.
Three sets of accounts are enough to see who paid for growth
The calculation is done on the last three or five approved financial statements: equity divided by total assets, year by year. If the ratio rises, the company has financed itself more and more with the shareholders' money, through new contributions or through profits left in the business. If it falls, there are two possible causes: losses have eaten into equity, or the growth has been paid for mainly by banks, suppliers and other creditors. The income statement for the same years shows which of the two.
Next to that series goes the largest loss the company has made in the last ten years. One question remains: how many years like that could it withstand with the equity it has today?
This article was prompted by a news item published in Handelsblatt on 20 October 2026.