Any business must not be hungry for capital. That means; too much capital tends to dilute the earnings per share and the ROE of the company. What exactly do we mean by equity? Here equity does not only refer to the share capital but also to the share premium and the general reserves. In short, all the reserves that are created out of ploughing back of profits are part of your equity. Remember, equity has to be serviced. If the company pays a hefty dividend then it is fine. But if the company pays less dividends and ploughs back more of the profits, then the company must ensure that it has a high enough ROE to justify ploughing back. If your equity base is too large then it negatively impacts the EPS and the ROE and therefore impacts the valuation of the company. Normally, companies with low equity and high growth opportunities have the potential to generate the best returns. You will normally find that the companies that create wealth on a sustainable basis are the ones with low equity bases.