Equity spread

Equity spread measures the value created by the equity base of a business. It is the difference between the return on equity for a period and the cost of equity, which is then multiplied by the beginning equity balance. The equity spread is improved by increasing the return on equity, which can be done in the following ways:

  • Increase the profit percentage on sales
  • Shift to a higher proportion of debt funding
  • Increase the rate of turnover, thereby reducing the need to invest in more assets