# Equity Multiplier

## What it is:

The **equity multiplier** is a ratio used to determine the financial leverage of a company.

## How it works (Example):

The formula for the *equity multiplier *is:

Equity Multiplier = Total Assets / Total Stockholders' Equity

If company ABC has total assets of 20 units and total stockholders' equity of 4 units, its equity multiplier is 5 (20/4).

Alternatively, company XYZ has total assets of 10 units and total stockholders' equity of 5 units, its equity multiplier is 2 (10/5).

Since company ABC has a higher equity multiplier, it can be said to rely more heavily on debt in order to finance its assets.