Loading the player...

What is the 'Equity Multiplier'

The equity multiplier is calculated by dividing a company's total asset value by total net equity, and it measures financial leverage. Companies finance their operations with equity or debt, so a high equity multiplier indicates that a larger portion of asset financing is attributed to debt. The equity multiplier is a variation of the debt ratio, and its definition of debt financing includes all liabilities.

!--break--Calculation of the equity multiplier is relatively simple and straightforward. Consider the balance sheet of Apple Inc. as of March 2016. The company's total assets were $305 billion, and the book value of shareholder equity was $130 billion. The company's equity multiplier was therefore 2.34. Verizon Communications Inc. operates a very different business model with more financial leverage. The company's total assets were $245 billion as of March 2016, with $19 billion of shareholder equity. The equity multiplier was 13.1, based on these values.

Leverage Analysis

Verizon's much lower proportionate shareholder equity value indicates that the business relies more heavily on financing from debt and other liabilities. The company's telecommunications business model is reminiscent of utilities firms, which have stable, predictable cash flows and typically carry high debt levels. Verizon's closest peer, AT&T Inc. also has one of the highest equity multipliers among the largest companies traded on U.S. exchanges, though it is much lower at 3.3 than Verizon's ratio of 13.1.

Apple is an established, mature business that can comfortably service debt, and it has issued notes to gain access to capital at relatively attractive costs. However, the company is more susceptible to changing economic conditions or evolving industry standards than utilities or large telecommunications firms. As a result, Apple has less financial leverage. These differences in business models mean that higher financial leverage does not necessarily indicate superior financial health.

DuPont Analysis

The equity multiplier is an important factor in DuPont analysis, which is a method of financial assessment devised by the DuPont Corporation for the purpose of internal review. The DuPont model breaks return on equity (ROE) into its constituent pieces, which are popular financial ratios and metrics. Net profit margin, asset turnover and the equity multiplier are combined to calculate ROE, which allows analysts to consider the relative of each impact separately. If ROE changes over time or diverges from normal levels for the peer group, DuPont analysis indicates how much of this is attributable to financial leverage. If the equity multiplier fluctuates, it can significantly impact ROE. Higher financial leverage drives ROE upward, all other factors remaining equal.

BREAKING DOWN 'Equity Multiplier'

  1. Leverage Ratio

    A leverage ratio is any one of several financial measurements ...
  2. Leverage

    The use of various financial instruments or borrowed capital, ...
  3. Market Value Of Equity

    The total dollar market value of all of a company's outstanding ...
  4. Earnings Multiplier

    The earnings multiplier relates a company's current stock price ...
  5. Investment Multiplier

    The term investment multiplier refers to the concept that any ...
  6. Capital Structure

    A mix of a company's long-term debt, specific short-term debt, ...
Related Articles
  1. Investing

    Analyzing Verizon's Return on Equity (ROE) (VZ)

    Learn about Verizon's return on equity and find out how ROE is influenced by net profit margin, asset turnover ratio and financial leverage.
  2. Investing

    Decoding DuPont Analysis

    Get a deeper understanding of ROE with these three-step and five-step calculations.
  3. Investing

    Analyzing American Airlines’ Return on Equity (AAL)

    Learn about American Airlines' return on equity (ROE). Find out why American's ROE is now positive and how financial leverage impacts ROE relative to peers.
  4. Investing

    Analyzing Boeing’s Return on Equity (ROE) (BA)

    Learn about Boeing's return on equity and find out how the company's ROE compares to its own historical performance and aerospace industry peers.
  5. Investing

    High Return On Equity Businesses

    Companies with high returns on equity usually see an increasing stock price in the future.
  6. Investing

    Analyzing Lockheed Martin's Return on Equity (LMT)

    Learn about Lockheed Martin's return on equity (ROE). Find out how DuPont analysis explains ROE relative to Lockheed's aerospace and defense industry peers.
  7. Investing

    Analyzing Gilead's Return on Equity (GILD, NVO)

    Explore Gilead Science's 2015 return on equity (ROE). Learn about the impact of net margin, asset turnover and financial leverage on ROE.
  8. Investing

    Analyzing Tesla's Return on Equity (TSLA, FCAU)

    Learn about Tesla's return on equity (ROE). With DuPont analysis, discover why ROE has been negative since Tesla's IPO and how it compares to other automakers.
  9. Investing

    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.
  10. Insights

    How Do Tech Companies Measure ROA And ROE?

    The return on Assets (ROA) and return on equity (ROE) are often used metrics to measure the returns generated by a company.
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What is the difference between a company's equity and its shareholders' equity?

    Understand the difference and the interrelationship between shareholders' equity in a company and the company's actual total ... Read Answer >>
  5. How do you calculate return on equity (ROE)?

    Return on Equity (ROE) measures how efficiently a company's executives are generating income from the equity investments ... Read Answer >>
  6. What is the average return on equity for a company in the insurance sector?

    Learn about the commonly used metric in valuations, return on equity, and its average value for a typical company in the ... Read Answer >>
Hot Definitions
  1. Receivables Turnover Ratio

    Receivables turnover ratio is an accounting measure used to quantify a firm's effectiveness in extending credit and in collecting ...
  2. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  3. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  4. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  5. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  6. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
Trading Center