Definition of Equity Multiplier
Equity multiplier is a tool to assess the company’s leverage. It tells us the number of assets that are financed by stockholders’ equity instead of debt.
Equity Multiplier is calculated using the following Formula:
Equity multiplier = Total Assets / Total Stockholders’ equity
This measure tells us the level of equity or debt finance in a company, just like the capital structure. The company finances all its assets either through equity or through debt. When the equity multiplier is showing a high number, this means that the assets are mostly financed with debt. This shows that the company is highly leveraged.
When the equity multiplier is smaller, it means that the assets are mostly financed with equity and that the company is less leveraged. This is generally considered a stable condition.