Everything you need to know about Equity
Multiplier
Equity multiplier is a ratio that measures the
financial leverage of a company. How much a
company can afford to use its debt for financing its
assets is Equity Multiplier. The equity multiplier can
also be termed as the leverage ratio or the
financial leverage ratio.
Equity multiplier evalutaes how much a company’s total assets per dollar of stockholders’ equity are.
A higher the equity multiplier indicates higher financial leverage concluding that the company relies more on debt to finance its assets.
The formula for calculating Equity Multiplier ratio is:
Equity Multiplier =Total Assets
Stockholder's Equity In addition to this
formula, an alternative formula is also used for calculating equity multiplier:
1 / Equity Ratio
The equity multiplier formula is used to calculate the Return on Equity.
In the formula for ROE, Equity multiplier contributes to financial leverage, a tool of financial analysis that assesses a company's use of debt.
Here are a few simple guideline points as to how
to bring Equity Multiplier to use.
Calculate the the equity multiplier using the formula. Obtain your direct competitors’ data and calculate the equity
multiplier for these companies. Along with that, calculate the average Equity Multiplier of the industry as a whole.
Compare your equity multiplier with that of its competitors and the average of the industry. A higher equity multiplier than the average indicates too much of risk involved in the company’s actions.
At last, compare your own past records with the current equity multiplier to identify the ups and downs.
Still got
doubts?
Transtutors provides a 24*7 online platform where you can ask questions and get almost instant reply and finest answers. With a team of experienced expert tutors from different corners of the world, we promise to deliver answers that can fetch you top grades. Ask any question on Equity multiplier or Finance in general and get best answers at a price very nominal only at
Transtutors!
Follow us:
TranstutorsA vision to build a worldwide youth nation with spectrum of knowledge
and diversity of intelligence to share among all...
www.transtutors.com
Top Related