Equity Multiplier

AAA

DEFINITION of 'Equity Multiplier'

The ratio of a company’s total assets to its stockholder’s equity. The equity multiplier is a measurement of a company’s financial leverage. Companies finance the purchase of assets either through equity or debt, so a high equity multiplier indicates that a larger portion of asset financing is being done through debt. The multiplier is a variation of the debt ratio.

INVESTOPEDIA EXPLAINS 'Equity Multiplier'

The ratio is calculated fairly simply. For example, a company has assets valued at $3 billion and stockholder equity of $1 billion. The equity multiplier value would be 3.0 ($3 billion / $1 billion), meaning that one third of a company’s assets are financed by equity.

The equity multiplier gives investors an insight into what financing methods a company may be able to use to finance the purchase of new assets. It's also an indicator of potential threats a company may face from economic conditions that affect the debt-equity mix.

A high equity multiplier is not necessarily better than a low multiplier. In order to develop a better picture of a company’s financial health, investors should take into account other financial ratios and metrics, such as net profit margin or asset turnover. If it is cheaper to borrow than issue new shares, financing asset purchases through debt may be more cost-effective than a secondary issue.

RELATED TERMS
  1. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  2. Investment Multiplier

    The term investment multiplier refers to the concept that any ...
  3. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account ...
  4. Equity

    1. A stock or any other security representing an ownership interest. ...
  5. Asset

    1. A resource with economic value that an individual, corporation ...
  6. Current Ratio

    A liquidity ratio that measures a company's ability to pay short-term ...
Related Articles
  1. Cash Flow Statement: Analyzing Cash ...
    Fundamental Analysis

    Cash Flow Statement: Analyzing Cash ...

  2. The Optimal Use Of Financial Leverage ...
    Investing Basics

    The Optimal Use Of Financial Leverage ...

  3. Financial Analysis: Solvency Vs. Liquidity ...
    Fundamental Analysis

    Financial Analysis: Solvency Vs. Liquidity ...

  4. An Introduction To Coverage Ratios
    Fundamental Analysis

    An Introduction To Coverage Ratios

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center