It determines the part of total assets financed using debt as well as equity. For example, suppose the equity multiplier calculator provides an answer equal to 3 times. In that case, this simply means that one part of the total asset is financed with the help of equity, and the remaining two-part are using debt.
There is no defined ideal equity multiplier that helps in understanding or indicating whether a company has a good equity base or is sufficiently funded with shareholders’ money or not. To check this, the management of the company should compare its equity multiplier with the industry-standard equity multiplier. Or, the company can also evaluate using its own past equity multipliers. Or can compare with a similar-level company in the same industry.
More assets financed using debt is risky. If the company’s equity multiplier is constantly increasing from the past, it means the company is financing its assets using more debt and less equity.
The formula for calculating the equity multiplier is as follows:
Equity Multiplier = Total Assets / Total Shareholder’s Equity
Equity Multiplier Calculator
How to Calculate using a Calculator?
The equity multiplier calculator requires only the following two variables to be inserted.
Total Assets – Enter the amount of total assets of the business. This figure can be simply obtained from the balance sheet of the company. It is a total of either side of the balance sheet (total asset = equity + liability).
Total Shareholders’ Equity – It does include the amount of preference share equity and Common shareholders’ equity.