Equity Multiplier Calculator

Equity Multiplier

It determines the part of total assets financed using debt as well as equity. For example, if the equity multiplier calculator provides an answer equal to 3 times, 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 of debt and less of equity.

Formula

The formula for calculating equity multiplier is as follows:

Equity Multiplier = Total Assets / Common Shareholder’s Equity

Equity Multiplier Calculator

Calculator

How to Calculate using 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).

Common Shareholders’ Equity

It does not include the amount of preference share capital as preference capital has a fixed payment obligation attached to it. Common shareholders’ equity includes equity capital and reserve funds of the company. We can also call it Shareholders’ Kitty.

Example

Consider the following data of two companies, X and Y, operating in the same sector.

ParticularsXY
Total Assets ($)300,000110,000
Common Shareholder’s Equity ($) (incl reserves)60,00055,000
Equity Multiplier52

The above calculation shows that company X uses more debt in financing assets in comparison to company Y. Company Y uses both equity and debt in equal proportions for financing its assets. While company X uses 20% equity and rest 80% debt.

Interpretation

As said above, there is no ideal equity multiplier for evaluating a company’s equity multiplier. The management should look for the industry-standard equity multiplier or its previous multipliers.

Assume that the equity multipliers of the last 3 years of both the companies are as follows:

YearXY
142
272
352

Company Y has financed its assets by debt and equity in the same proportion in all three previous years and thus has a stable funding pattern over the years. While company X has fluctuating equity multipliers in past. The fluctuations are also quite sharp instead of being a gradual one.

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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