Equity Multiplier Formula

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.

Equity Multiplier Formula = Total Assets/Total Shareholders’ Equity

Equity Multiplier Formula

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Source: Equity Multiplier Formula (wallstreetmojo.com)

Explanation

Inequity multiplier formula, there are two components that need to be discussed.

This ratio is a pretty useful ratio for all investors since it helps them understand the financial leverFinancial LeverFinancial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. read more

age of a companyAge Of A CompanyFinancial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. read more.

Examples

Here’s a practical example to understand this formula better.

You can download this Equity Multiplier Excel Template here – Equity Multiplier Excel Template

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 ratiosFinancial RatiosFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more.

Equity Multiplier – Godaddy vs. Facebook

Equity Multiplier
  • 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.

Uses

By using this multiplier, an investor is able to know whether a company invests more in debt or more in 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

Total Assets
Total Shareholders' Equity
Equity Multiplier Formula
 

Equity Multiplier Formula =
Total Assets
=
Total Shareholders' Equity
0
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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.

Total Assets

Now, We will find the equity multiplier.

Excel Example

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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