Formula to Calculate Equity Multiplier
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.
The Equity multiplier compares the total assets of the company with the shareholders’ equity of the firm. It is a financial leverage ratio which helps to find out how much assets of the firm is financed by the shareholders’ equity.
Inequity multiplier formula, there are two components that need to be discussed.
- First, we have 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 a total shareholders’ equity. We all know that shareholders’ equity is one of the most critical 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 lever
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Here’s a practical example to understand this formula better.
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 industries and also glance at different financial ratios.
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.
- It 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 independent of debt.
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 much financial leverage to grow well in the near future.
- The idea of finding out the equity multiplier 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 real picture of the company by just looking at one ratio, you don’t know much by only looking at the equity multiplier ratio. It would help if you also looked 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
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Calculate Equity Multiplier in Excel
Let us now do the same example above in Excel. It 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 article 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