Calculating Equity Multiplier is straightforward, which helps to know the shareholders’ net equity finances and the number of assets of a firm. Suppose the Equity Multiplier ratio is 2, which means investment in total assets is 2 times by total equity of shareholders. These real-world examples from Apple and Verizon illustrate how companies can have different financial strategies reflected in their equity multipliers.

In calculating the equity multiplier, only the equity attributable to ordinary stock is taken into account. There are nuances to be aware of in order to find the correct data for calculating equity multiplier. This program breaks down everything you need to build and interpret real estate finance models. Used at the world’s leading real estate private equity firms and academic institutions. The general rules of thumb for interpreting the equity multiple are as follows.

## Examples of Equity Multiplier Analysis

Meanwhile, Verizon’s telecommunications business model is similar to utility companies, which have stable, predictable cash flows and typically carry high debt levels. Apple is thus more susceptible to changing economic conditions or evolving industry standards than a utility or a traditional telecommunications firm. The formula for calculating the equity multiplier consists of dividing a company’s total asset balance by its total shareholders’ equity. The debt ratio shows the proportion of a company’s assets that are financed by credit obligations. It is usually calculated as the ratio of a company’s debt to its total assets.

- They are categorized as either current assets, which can be easily converted to cash within a year, or non-current assets, which can’t.
- In the event of a crisis, a heavily indebted business runs the risk of losing the ability to service debt and run operations due to declining profits.
- It demonstrates the proportion of a company’s assets funded by shareholder equity versus debt.
- The amount of a company’s shareholders’ equity and the total value of all its assets can be found in the balance sheet.
- To calculate the shareholders’ equity account, our model assumes that the only liabilities are the total debt, so the equity is equal to total assets subtracted by total debt.
- Generally, a lower equity multiplier (closer to 1) implies less financial risk but potentially lower returns.
- This makes Tom’s company very conservative as far as creditors are concerned.

Company A has a lower Equity Multiplier than Company B, which means company B uses more debt to fund their business. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. If ROE increases solely due to an increase in EM, this is a warning sign. The first one (Total assets) is presented in the last row under the Assets section. From Year 1 to Year 5, the net cash proceeds attributable to the investor are fixed at $300k each period.

## How to Use Equity Multiplier in DuPont Analysis?

High leverage can be part of an effective growth strategy, especially if the company is able to borrow more cheaply than its cost of equity. There is no one-size-fits-all equity multiplier that would be considered good for any company. In general, numbers in the range of 0.8 to 1.5 are considered safe leverage.

The equity multiplier is a useful tool for investors to monitor risk and understand how a company generates returns for investors. It’s helpful by itself and as part of a DuPont analysis, which is a financial tool that breaks out how a company generates a return on equity (ROE). Because their assets are generally financed by debt, companies how to calculate equity multiplier with high equity multipliers may be at risk of default. Higher equity multipliers typically signify that the company is utilizing a high percentage of debt in its capital structure to finance working capital needs and asset purchases. This is a method for assessing the financial attractiveness of a business developed by DuPont.

## Is a High Equity Multiplier Always a Cause for Concern?

When looked at in conjunction with the equity multiplier, these two can provide a deeper insight into a company’s financial performance. Understanding the equity multiplier isn’t just an academic exercise; it has real-world applications that can affect your bottom line. Whether you’re an investor, a creditor, or a business owner, this financial ratio can offer you valuable insights. It’s important to remember that the Equity Multiplier

of a company should only be compared to the industry standard or to other companies

in the same sector. The best way to examine it is to compare it over time and

look for a trend.