Equity Multiplier

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What is the '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.

BREAKING DOWN '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.

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RELATED FAQS
  1. Which is better: A high or low equity multiplier?

    Learn about the equity multiplier, how it is calculated, what it measures and why a low equity multiplier is preferred to ... Read Answer >>
  2. How do companies use the equity multiplier to determine a financing strategy?

    Find out how the equity multiplier reflects a company's degree of financial leverage and how businesses use this ratio when ... Read Answer >>
  3. How can I use the equity multiplier to determine if a stock is a good investment?

    Find out how investors use the equity multiplier ratio in fundamental analysis to determine whether a given stock is a solid ... Read Answer >>
  4. How does the equity multiplier change in relation to asset turnover?

    Find out about the relationship between the equity multiplier and the asset turnover ratio and how both are used in the DuPont ... Read Answer >>
  5. What is the equity multiplier's affect on Return on Equity (ROE)?

    Learn about how to calculate the equity multiplier in the three-step DuPont analysis method, and see what impact a higher ... Read Answer >>
  6. How does DuPont Analysis measure financial leverage?

    Learn about how DuPont analysis measures financial leverage using the equity multiplier, and see when the equity multiplier ... Read Answer >>
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