This equity multiplier calculator estimates the equity multiplier which is a measure of financial leverage of a company, as it demonstrates its ability to use debts for financing its assets. You can discover more below the form.
Understanding the equity multiplier concept
Equity multiplier, often referred to as the leverage ratio refers to a method of assessing the ability of a company to use its debt to finance its assets by comparing the figure of the total assets against the one of stockholder's equity.
In regard of its levels, the higher the equity multiplier, the higher the financial leverage is which demonstrates that the entity in question uses more debts to finance its assets rather than internal financial resources.
The equity multiplier is calculated by dividing the value of assets a company owns to its stockholder’s equity.
Equity Multiplier = Total Assets / Stockholder's Equity
An alternative to the traditional formula to estimate the equity multiplier is by dividing 1 by the Equity ratio.
The interpretation of the equity multiplier levels should not be done separately from other figures that may help in understanding the financial position of a company. For instance before concluding whether the equity multiplier level is a negative signal, financial experts advice to include the cost of financing (interest rate on loans and debts) in the analysis too. This is because if the cost with the interest paid on loans and debts is low or tends to zero specialists recommend to rely on debts to develop a business either new or a established one.
Another aspect to take account of when measuring the equity multiplier is to have a clear image of the short term decisions and perspectives of the company, in other words check if there are any decisions that are assumed by the management.
Example of a calculation
Company A is audited by an external auditor. The audit team finds the following figures and fill them in this equity multiplier calculator:
- Total assets = $200,000
- Stockholder’s equity = $55,000
The result they will get is Equity multiplier = $200,000 / $55,000 = 3.6363.19 Apr, 2015