Loading the player...

What is the 'Equity Multiplier'

The equity multiplier is a commonly used financial ratio calculated by dividing a company's total asset value by total net equity. It is a measure of financial leverage. Companies finance their operations with equity or debt, so a higher equity multiplier indicates that a larger portion of asset financing is attributed to debt. The equity multiplier is therefore a variation of the debt ratio, in which the definition of debt financing includes all liabilities.

Calculation of the equity multiplier is relatively simple and straightforward. Consider the balance sheet of Apple Inc. (AAPL) as of the end of fiscal year 2017. The company's total assets were $375 billion, and the book value of shareholder equity was $134 billion. The company's equity multiplier was therefore 2.8x, which can be compared with its equity multiplier for the year 2016, which was 2.34x. We can compare equity multipliers between two companies. Verizon Communications Inc. (VZ) operates with a very different business model that includes more financial leverage. The company's total assets were $257 billion as of end of fiscal year 2017, with $43 billion of shareholder equity. The equity multiplier was 6x, based on these values.


BREAKING DOWN 'Equity Multiplier'

Leverage Analysis

Verizon's much lower proportionate shareholder equity value indicates that the business relies more heavily on financing from debt and other interest-bearing liabilities. The company's telecommunications business model is more reminiscent of utilities firms, which have stable, predictable cash flows and typically carry high debt levels.

On the other hand, Apple is more susceptible to changing economic conditions or evolving industry standards than utilities or large traditional telecommunications firms. As a result, Apple has less financial leverage. Differences in business models mean that higher financial leverage does not necessarily indicate superior financial health.

DuPont Analysis

The equity multiplier is also an important factor in DuPont factor analysis, which is a method of financial assessment devised by the DuPont Corp. 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 affect ROE. Higher financial leverage drives ROE upward, all other factors remaining equal.

  1. DuPont Analysis

    DuPont analysis is a fundamental performance measurement framework ...
  2. Leverage

    Leverage results from using borrowed capital as a source of funding ...
  3. Return on Equity (ROE)

    Return on equity refers to the profitability returned in direct ...
  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. Equity Financing

    If a company needs capital to support its growth, it might seek ...
Related Articles
  1. Investing

    Analyzing Apple's Return on Equity (AAPL)

    Learn about Apple's return on equity (ROE) in fiscal 2015, and find out how net profit margin, financial leverage and asset turnover impact ROE relative to its peers.
  2. Investing

    Analyzing Facebook's Return on Equity (FB)

    Learn about Facebook's return on equity (ROE), and find out how it compares to its peers. Discover how net margin, asset turnover and financial leverage impacted its ROE.
  3. Investing

    Analyzing Delta's Return on Equity (DAL)

    Learn about Delta Air Lines' return on equity (ROE). Find out how net margin, asset turnover and financial leverage impact its ROE relative to its airline industry peers.
  4. 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.
  5. Investing

    How Return On Equity Can Help You Find Profitable Stocks

    It pays to invest in companies that generate profits more efficiently than their rivals. This is where ROE comes in.
  6. 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.
  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

    High Return On Equity Businesses

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

    Analyzing Yahoo's Return on Equity (YHOO)

    Learn about Yahoo's return on equity (ROE) and find out how net margin, asset turnover and financial leverage impact its ROE relative to industry peers.
  10. Investing

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  1. What are some of the advantages and disadvantages of DuPont Analysis?

    Learn about the DuPont analysis financial ratio, and understand some of its primary advantages and disadvantages. Read Answer >>
  2. What Level of Return on Equity is Common for Bank?

    Discover what the average return on equity (ROE) ratio is for companies in the banking industry, and understand the significance ... Read Answer >>
  3. What are the differences between three-step and five-step DuPont Analysis?

    Learn the basic features of DuPont analysis and understand the key differences between performing the three-step or five-step ... Read Answer >>
  4. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ... Read Answer >>
  5. 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 >>
  6. What is the difference between the deposit multiplier and the money multiplier?

    Explore the deposit multiplier and the money multiplier, two fundamental concepts of Keynesian economics, and learn how they ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center