Equity Multiplier Definition

Equity Multiplier Definition

See Also:
Define Leverage (Finance)
Operating Leverage
Long Term Debt to Total Asset Ratio Analysis
Debt Ratio Analysis

Equity Multiplier Definition

The equity multiplier definition, also referred to as leverage of a company, is the amount of debt and other liabilities a firm has assumed as a percentage of the total assets on average throughout the year.

Equity Multiplier Meaning

Companies most often use the equity multiplier in finance for purposes of testing the financial strength of a company. If the equity multiplier ratio contains a high amount of debt or leverage, then this means the firm may be reaching distress costs. High levels might also mean that the company has an inability to gain further financing to push into new markets. On the other hand, a company that has a lower equity multiplier debt ratio may not be taking advantage of the tax savings given to companies in the U.S. market. It is up to a firm to decide what its ideal ratio should be by determining an amount of debt that fits with the overall strategy of the company.

Equity Multiplier Equation

Use the following equity multiplier ratio formula to calculate the equity multiplier:

Equity Multiplier = Avg. Total Assets/ Avg. Stockholders’ Equity

equity multiplier definition, equity multiplier equation

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