What is an Equity Multiplier?

The reciprocal of the ratio of shareholders 'equity is called the equity multiplier, that is, how many times the total assets are the total shareholders' equity, which is an indicator in the DuPont analysis method. The equity multiplier reflects the size of the company's financial leverage. The greater the equity multiplier, the smaller the proportion of capital invested by shareholders in assets, the greater the financial leverage.

Equity Multiplier

Equity Multiplier EM

Equity Multiplier

Equity multiplier = total assets / total shareholders' equity = 1 / (1-

A large equity multiplier indicates that a company has more debt, which generally results in a higher financial leverage and greater financial risk. In corporate management, it is necessary to seek an optimal capital structure to obtain the appropriate EPS / CEPS to achieve Maximize Enterprise Value. For another example, when the cost of borrowed capital is less than the company's asset reward, the borrowed funds will first have a tax avoidance effect (pre-tax deduction of debt interest), increase EPS / CEPS, and increase leverage, so that the value of the enterprise will increase as debt increases. However, the expansion of leverage also increases the possibility of bankruptcy, and the risk of bankruptcy will reduce the value of the enterprise.

Equity multiplier, representing the total available assets of the company is several times the owner's equity. The greater the equity multiplier, the greater the financial leverage on behalf of the company's external financing, and the greater the risk the company will bear. However, if the company's operating conditions are just in an upward trend, a higher equity multiplier can instead create higher corporate profits. By increasing the company's return on shareholders' equity, it will have a positive incentive effect on the company's stock value.