Equity Multiplier Formula (Table of Contents)
- Equity Multiplier Formula
- Equity Multiplier Calculator
- Equity Multiplier Formula in Excel (With Excel Template)
Equity Multiplier Formula
Equity Multiplier Formula is a division of Total Assets and Total shareholder’s Net Equity of a company.
Equity Multiplier can be mathematically expressed as Total Assets / Total Shareholder’s Net Equity
Equity Multiplier is nothing but a company’s financial leverage. Calculation of Equity Multiplier is simple and straightforward which helps to know the amount of assets of a firm is financed by the shareholders’ net equity. Suppose Equity Multiplier ratio is 2 that means investment in total assets is 2 times by total equity of shareholders.
Examples of Equity Multiplier Formula
Suppose ABC Company has $ 500,000 of Total Shareholders’ Equity while Current Assets are $ 300,000 and Non-current Assets are $ 240,000.
To this, firstly we are supposed to find out the total assets
- Total assets are an addition of Current Assets and Non-current Assets that is
- $ 300,000 + $ 240,000= $ 540,000
- Total shareholders’ equity is given already $500,000.
By using the Equity Multiplier formula, we can easily get
- Equity multiplier = Total Assets / Total Shareholders’ Equity
- Equity Multiplier = $ 540,000 / $ 500,000 = 1.08
From the above example, it can be concluded that a company’s growth is fuelled by the shareholder’s fund, not by the debt from the banks or financial institutions. Less the Equity Multiplier, less company is leveraged.
In below example, we can see that –
Imagine XYZ Company has Total Assets of $200 Millions and Shareholder’s Equity is $ 40 Million while Preferred Share is $ 20 Million.
- Equity multiplier = Total Assets / Total Shareholders’ Fund
- Equity multiplier = 200 / 40
- Equity multiplier = 5
This simply expressed that total assets are 5 times the total shareholder’s equity. It shows, a company is heavily leveraged, 5 times of the equity capital infused by the shareholders.
Explanation of Equity Multiplier Formula
There are two main components that need to be discussed in equity multiplier formula total assets and common shareholders’ equity-
Total assets are simply meant all current assets (debtors, inventories, prepaid expenses etc.) and non-current assets (building, machinery, plants, furniture etc) of the company’s balance sheet. Common Shareholder’s Equity includes common shareholder’s funds only. This is important to note that preference shares would not be part of this because of its nature of the fixed obligation. Shareholders include both preferred shares and common shares. This ratio is very useful for all investors as it helps them to understand the financial leverage of a company.
Both the components can be found in the balance sheet of the company. Only Equity multiplier ratio cannot be used for analysis of the company, as some industries are capital-centric and need more capital than other industries. An investor needs to pull out other peer companies in a similar industry and calculate equity multiplier ratio for them and compare it. If you see that the result is similar or close to the industry benchmark, to the company you want to invest into, you should be able to understand that low or high financial leverage ratios are the benchmark of the industry.
Significance and Use of Equity Multiplier Formula
- Equity Multiplier Formula helps investors to know whether a company invests more in equity or more in debts.
- Higher Equity multiplier ratio indicates that the company is much dependent on the debt for its financing source. It also indicates that it would be risky for investing in such a company.
- When Company is mainly sourced by equity and debt financing is low it means equity multiplier ratio is also low. While Multiplier ratio is low company does not have much financial leverage to build more in the future through the future is uncertain. To balance both equity ratio and debts the idea of equity multiplier plays a vital role.
- For purposes of testing the financial strength of a company, the equity multiplier formula is used most. This formula results higher or lowers equity multiplier ratio. A higher amount of debts or leverage means the firm may be reaching risky
- The equity multiplier formula is part of the return on equity DuPont formula for the financial leverage portion of DuPont analysis
Equity Multiplier Calculator
You can use the following Equity Multiplier Calculator
|Equity Multiplier Formula=||=||
Equity Multiplier Formula in Excel (With Excel Template)
Here we will do the same example of the Equity Multiplier formula in Excel. It is very easy and simple. You need to provide the two inputs Total Assets and Total Shareholders’ Fund
You can easily calculate the Equity Multiplier formula in the template provided.
In order to find out the Equity Multiplier, we need to find out the two things i.e Total Assets and Total Shareholders’ Fund.
Here in the first example, total assets value is not given so first we need to calculate Total Assets. i.e
Total Assets = Current Assets + Non-current Assets
Then we need to calculate Equity Multiplier.
Here in the Second example, Total Assets is 200 and Total Equity is 40. So here We directly Calculate Equity Multiplier using formula
This is a guide to Equity Multiplier formula. Here we discuss its uses along with practical examples. we also provide you with equity multiplier calculator along with a downloadable excel template. You may also look at the following articles to learn more –