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. When analyzing a company's cash flow statement, it is important to consider each of the various sections that contribute to the overall change in cash position.
    Fundamental Analysis

    Cash Flow Statement: Analyzing Cash Flow From Financing Activities

    The financing activity in the cash flow statement measures the flow of cash between a firm and its owners and creditors.
  2. Capital can be raised by issuing either stocks or bonds which make up a firm's capital structure.
    Investing Basics

    The Optimal Use Of Financial Leverage In A Corporate Capital Structure

    The amount of debt and equity that makes up a company's capital structure has many risk and return implications.
  3. A solvent and liquid company may indicate a good buy for an investor.
    Fundamental Analysis

    Financial Analysis: Solvency Vs. Liquidity Ratios

    Solvency and liquidity are equally important for a company's financial health. A number of financial ratios are used to measure a company’s liquidity and solvency, and an investor should use ...
  4. Coverage ratios are useful for analyzing a company's ability to repay its debt.
    Fundamental Analysis

    An Introduction To Coverage Ratios

    Interest coverage ratios help determine a company's ability to pay down its debt.
  5. Investing Basics

    Understanding Leverage Ratios

    Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios - including the debt, ...
  6. Bonds & Fixed Income

    Why Companies Issue Bonds

    When companies need to raise money, issuing bonds is one way to do it. A bond functions like a loan between an investor and a corporation.
  7. Forex Education

    Find Equity Opportunities With Currency Moves

    Understanding the relationship between these markets can help you spot profitable stocks.
  8. Options & Futures

    A New Approach To Equity Compensation

    The new financial accounting standard known as FAS 123R could take a bite out of your portfolio. Find out why here.
  9. Mutual Funds & ETFs

    How To Profit From Debt Securities In Failing Companies

    Learn about the vulture funds that prey on the market's weakest companies by investing in distressed debt.
  10. Investing

    Debt Reckoning

    Learn about debt ratios and how to use them to assess a company's financial health. You could save a lot of money!

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center