The formula for equity multiplier is total assets divided by stockholder's equity. Equity multiplier is a financial leverage ratio that evaluates a company's use of debt to purchase assets.
Equity multiplier is an important input in the DuPont return on equity analysis. DuPont return on equity analysis breaks up ROE into net profit margin, asset turnover and financial leverage (represented by equity multiplier as shown below:
| ROE Under DuPont Analysis = | Net Income | × | Sales | × | Total Assets | = | Net Income |
| Sales | Total Assets | Total Equity | Total Equity |
The equity multiplier is a ratio used to analyze a company's debt and equity financing strategy. A higher ratio means that more assets were funding by debt than by equity. In other words, investors funded fewer assets than by creditors.
When a firm's assets are primarily funded by debt, the firm is considered to be highly leveraged and more risky for investors and creditors. This also means that current investors actually own less of the company assets than current creditors.
Lower multiplier ratios are always considered more conservative and more favorable than higher ratios because companies with lower ratios are less dependent on debt financing and don't have high debt servicing costs.
When a firm's assets are primarily funded by debt, the firm is considered to be highly leveraged and more risky for investors and creditors. This also means that current investors actually own less of the company assets than current creditors.
Lower multiplier ratios are always considered more conservative and more favorable than higher ratios because companies with lower ratios are less dependent on debt financing and don't have high debt servicing costs.
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