Sitemap

Equity multiplier definition

Description

Equity multiplier is an important financial leverage ratio. This ratio shows how a company uses its debt to finance company’s assets. Equity multiplier is also known as the financial leverage ratio, or leverage ratio. Data to calculate this ratio is collected from balance sheet.

This ratio indicates company's total assets per one dollar of shareholders' equity. Equity multiplier interests both the company’s owners and the creditors.

Norms and limitations

There are no general norms for this ratio.

A higher value of equity multiplier indicates a stronger financial leverage. It means that the company’s activity might be considered more risky.

Formula

Assets (Total assets) – mean every asset that the company owns and that is shown on the balance sheet. Total assets equals total liabilities + owner’s equity.

Equity (Shareholders’ equity) shows the equity stake currently held on company’s balance sheet. In other words, it means total assets minus total liabilities.