Equity

Equity is the foundation of any company's finances. It shows how much of the company's value belongs to the owners – and how big a financial safety net the company has if operations come under pressure.

When assessing a company's financial strength, equity is one of the first key figures that analysts, lenders, and partners look at.

What is equity?

Equity is the portion of a company's assets that remains after all liabilities and debts have been deducted. In other words, it is the actual financial value that the owners have in the company.

In the financial statements, equity typically consists of:

Funds that the owners have contributed to the company – e.g., share capital.
Retained earnings
Profits that have been retained by the company rather than being paid out as dividends.

This combination shows both the company's history and its ability to build financial strength over time.

How to calculate equity

The formula is straightforward:

Equity = Assets – Liabilities

Assets include everything the company owns: cash, buildings, equipment, machinery, inventories, and accounts receivable.
Liabilities include the company's debts: bank loans, accounts payable, credit facilities, accrued expenses, etc.

Example:
Assets: DKK 10 million
Liabilities: DKK 7 million
→ Equity: DKK 3 million

Why is equity important?

Solid equity provides the company with:

1. Economic resilience

If the market fluctuates, customers pay late, or costs rise, the company has the financial leeway to withstand these challenges.

2. Credibility in the eyes of the outside world

Lenders, investors, and suppliers assess equity as an indicator of:

stability
risk
ability to pay bills
opportunity for growth

A company with low or negative equity is typically considered to be more risky.

3. Better access to credit

Banks and financial institutions view high equity as a security element. It increases the likelihood of approval for loans or credit lines.

How can the company strengthen its equity capital?

There are several ways to build a stronger equity base:

Capital injection
The owners inject more money – e.g. through new investments or share issues.
Retained earnings
The profit is reinvested instead of being paid out as dividends.
Debt reduction
When debt is reduced, equity automatically increases in the balance sheet.
Streamlining operations
Higher profits naturally generate greater accumulated equity.

The strategy depends on the company's goals, growth plans, and market situation.

Equity and risk analysis

When Collectia analyzes companies in terms of their ability to pay and risk profile, equity is a key indicator. Low or negative equity increases the risk of:

late payments
credit problems
liquidity challenges
insolvency

Conversely, strong equity indicates that the company can withstand fluctuations and unforeseen costs without becoming unstable.

Equity in Qatchr

A credit check in Qatchr gives you a direct overview of:

amount of equity
year-on-year development
ratio of equity to debt
other financial figures that affect the risk analysis

Ongoing credit monitoring provides notification when equity changes – e.g. due to new financial statements or changes in the balance sheet. This provides an important early warning if a customer or supplier is heading into a weaker financial position.