What is an Equity Multiplier?
The equity multiplier is a ratio used to determine the financial leverage of a company.
Equity Multiplier -- Formula & 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.
Why do Equity Multipliers matter?
Commonly employed to measure the extent to which a company finances its assets with debt, the equity multiplier is an important indicator of the financial health of a company: the higher the equity multiplier, the higher the level of financial leverage.