Equity Multiplier is a ratio that indicates a company’s ability to use its debt for financing its assets. The Equity Multiplier is also referred to as the Leverage Ratio and the Financial Leverage Ratio.
Equity Multiplier is a ratio that indicates a company’s ability to use its debt for financing its assets. It is also referred to as the Leverage Ratio and the Financial Leverage Ratio.
Equity Multiplier Formula
The Equity Multiplier ratio is calculated as total assets divided by the common stockholder’s equity.
A company’s assets equal the sum of debt and equity. The ratio consists of the equity portion of the assets of a company.
Alternate Formula Using Equity Ratio
An alternative formula that uses the Equity Ratio may also be used.
Equity Multiplier Interpretation
The Equity Multiplier formula calculates a company’s total assets per dollar of stockholders’ equity. It shows the extent that the financial leverage is used by a company to finance its assets.
There are three methods to analyze a company using the Equity Multiplier (financial leverage) ratio:
- Compare the financial leverage for direct competitors in which the company operates. The company might be taking too much risk if the company’s multiplier is higher than its competitors. If it is below the competitors' average, then the company is probably using a reasonable amount of debt.
- Calculate the company’s financial leverage in past years and compare them with the current value of the company to identify any alterations.
- Determine how the financial leverage ratio affects a firm's return on equity by using DuPont analysis.