Equity multiplier

What is equity multiplier

The equity multiplier is a financial leverage ratio that measures the portion of the company assets that are financed by its shareholders. It is calculated by dividing a company’s total asset by total net equity. The equity multiplier is a reverse version of debt ratio.

How to calculate equity multiplier

The formula for calculating equity multiplier is total assets of the company divided by the total shareholders equity.

Equity multiplier = Total assets / Total stockholder’s equity

The shareholders equity and the total assets of a company can be found on the balance sheet of the company financial reports.

Why is equity multiplier important

This ratio shows how much does a company like to get its assets financed by debt. A high multiplier indicates that a significant portion of a firm’s assets are financed by debt, while a low multiplier shows that either the firm is unable to obtain debt from lenders or the management is avoiding the use of debt to purchase assets.