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.