Financial Statement Analysis
- Efficiency Ratios
- Ratio Analysis (17+)
- Liquidity Ratios (29+)
- Turnover Ratios (17+)
- Profitability Ratios (66+)
- Dividend Ratios (9+)
- Debt Ratios (26+)
Equity multiplier formula calculates total assets to total shareholders equity; this ratio is the financial leverage of a company that determines how many times the equity of a company does a company have as compared to its assets.
Equity Multiplier Formula (Table of Contents)
Equity Multiplier Formula
Equity multiplier compares the total assets of the company with the shareholders’ equity of the firm. This is a financial leverage ratio which helps to find out how much assets of the firm is financed by the shareholders’ equity.
Here’s the equity multiplier formula –
Example of Equity Multiplier Formula
Here’s a practical example of equity multiplier formula.
Tee Wear has the following information –
- Current Assets – $36,000
- Non-current Assets – $144,000
- Total Shareholders’ Equity – $540,000
Find out the equity multiplier of Tee Wear.
First, we will find out the total assets.
- Total assets = (Current Assets + Non-current Assets) = ($36,000 + $144,000) = $180,000.
- Total shareholders’ equity is already given as $540,000.
Using the formula of equity multiplier, we get –
- Equity multiplier = Total Assets / Total Shareholders’ Equity = $180,000 / $540,000 = 1/3 = 33.33%.
Depending on the industry standard, we can figure out whether this ratio is higher or lower. For that, every investor needs to look at other companies under similar industry and also glance at other financial ratios.
4.9 (1,067 ratings)
Equity Multiplier – Godaddy vs Facebook
- We note from the above graph that Godaddy has a higher equity multiplier at 6.73x, whereas, Facebook’s Equity Multiplier is lower at 1.09x.
- This implies that Godaddy has a higher amount of assets per unit equity and is over-dependent on debt to finance its assets. Whereas, Facebook has a very Equity Multiplier (~1.09) meaning that it is literally independent of debt.
Explanation of Equity Multiplier Formula
In equity multiplier formula, there are two components that need to be discussed.
- First, we have the total assets. In total assets, we will include both current assets and non-current assets. Examples of current assets are debtors, inventories, prepaid expenses etc. And examples of non-current assets are building, machinery, plants, furniture etc. If you’re trying to find the total assets, you will find it in the balance sheet of the company.
- Second, we have total shareholders’ equity. We all know that shareholders’ equity is one of the most important four financial statements that every investor should look at. Under shareholders’ equity, we will include both common shares and preferred shares.
This ratio is a pretty useful ratio for all investors since it helps them understand the financial leverage of a company.
Use of Equity Multiplier Formula
By using this multiplier, an investor is able to know whether a company invests more in debt or more in equity.
- If the equity multiplier ratio is higher, it indicates that the company is too dependent on the debt for its financing. It also means that investing in the company would be too risky for an investor.
- If the equity multiplier ratio is lower, it depicts that the company is mainly sourced by equity and debt financing is low. It also means that the company doesn’t have the much financial leverage to grow well in near future.
- The idea of finding out the equity multiplier formula is to balance both – debt and equity ratio. There’s no rule of thumb, but if a company has a debt-equity ratio of 2:1; it can be said that it’s maintaining a great balance between debt and equity.
As you can’t know the true picture of the company by just looking at one ratio; you don’t know much by only looking at equity multiplier ratio. You also need to look at dividend-related ratios, profitability ratios, debt-equity ratio, and other financial ratios to have a holistic view of the approach of the company. And looking at all ratios will also give you a solid base to make a prudent decision.
Equity Multiplier Calculator
You can use the following Equity Multiplier Calculator
|Equity Multiplier Formula =||
Equity Multiplier in Excel (with excel template)
Let us now do the same example above in Excel. This is very simple. You need to provide the two inputs of Total Assets and Equity Multiplier. You can easily calculate the equity multiplier ratio in the template provided.
First, we will find out the total assets.
Now, We will find the equity multiplier.
This has been a guide to Equity Multiplier Formula, practical examples, and equity multiplier calculator along with excel templates. You may also have a look at these articles below to learn more about Financial Analysis