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: